Triangle inequalities in international trade: The neglected dimension

Reto Foellmi, Christian Hepenstrick and David Torun

Journal of International Economics, 2024, vol. 152, issue C

Abstract: Estimating trade costs is key to understanding the welfare effects of trade liberalizations. Cost minimization implies that the triangle inequality (TI) of international trade costs must hold for any three countries to avoid cross-border arbitrage. We show that re-routing opportunities might arise when trade costs change because a shipment through an intermediary becomes cheaper. The TI captures such re-routing opportunities. However, standard approaches to calculating the gains from trade liberalizations ignore this no-arbitrage condition. We outline an estimation routine that is model-consistent and respects the TI. Counterfactual exercises suggest that the welfare gains from re-routing after trade liberalizations can be substantial.

Keywords: Trade costs; Re-routing; Triangle inequality; Exact hat algebra; Welfare (search for similar items in EconPapers)
JEL-codes: F10 F14 F17 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Triangle Inequalities in International Trade: The Neglected Dimension (2022)
Working Paper: Triangle Inequalities in International Trade: The Neglected Dimension (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:152:y:2024:i:c:s0022199624001454

DOI: 10.1016/j.jinteco.2024.104018

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