The Internet stimulates trade. Using a gravity equation of trade among 56 countries, we find no evidence of an effect of the Internet on total trade flows in 1995 and only weak evidence of an effect in 1996. However, we find an increasing and significant impact from 1997 to 1999. Specifically, our results imply that a 10 percent increase in the relative number of web hosts in one country would have led to about 1 percent greater trade in 1998 and 1999. Surprisingly, we find that the effect of the Internet on trade has been stronger for poor countries than for rich countries, and that there is little evidence that the Internet has reduced the impact of distance on trade. The evidence is consistent with a model in which the Internet creates a global exchange for goods, thereby reducing market-specific sunk costs of exporting.
We examine the effect of regionalism on unilateral trade liberalization using industry-level data on applied most-favored nation (MFN) tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. We find that preferential tariff reduction in a given sector leads to a reduction in the external (MFN) tariff in that sector. External liberalization is greater if preferences are granted to important suppliers. However, these "complementarity effects" of preferential liberalization on external liberalization do not arise in customs unions. Overall, our results suggest that concerns about a negative effect of preferential liberalization on external trade liberalization are unfounded.
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