Distance and Intraindustry Trade

This paper provides evidence on the importance of geographical distance by investigating the relationship between distance and the share of two-way trade in total trade. Findings are not consistent with the widely held view that intraindustry trade (IIT) falls off rapidly across the entire distance scale. Distance is found to exert a decreasingly positive effect on the IIT share. U.S. trade with Japan and major industrial nations in Western Europe heavily influences this pattern. Two-way trade is not as distance sensitive as previously thought. It is important to understand how geographical distance affects IIT because economic integration is more valuable when it allows countries to achieve greater specialization within the same industry. The insensitivity of the IIT share to geographical distance suggests distance may not exert a major influence on the optimal degree of regionalization for industrial nations.