Trust & Trade... Is distance dead?

Abstract

This report explores the facts behind the buzzwords ´globalisation` and ´the new economy`. In general we associate these concepts with a borderless world where economic transactions are managed through rapid electronic communication. This notion is questioned in this report, which presents an overview of investigations that have been conducted on trade flows. They conclude that trade is drastically reduced by distance and borders, contradicting the notion of a borderless world. The report emphasises, furthermore, that this phenomenon cannot be explained only by transportation costs. Another barrier to trade has to exist. The report outlines different possible explanations of this phenomenon, but focuses strongly on the significance of trust in transactions. It concludes that there is a range of explanations working together to explain why there is less trade over longer distances. However, the reduced possibility of finding trusting relations at distant locations is presented as a strong argument and a possible solution to the ´mystery of the missing trade`.