One consequence of melting Arctic ice caps is the commercial viability of the Northern Sea Route, connecting East Asia with Europe. This represents a sizeable reduction in shipping distances and average transportation days compared to the conventional Southern Sea Route. We examine the economic impact of opening this route in a multi‐sector Eaton–Kortum model with intermediate linkages. We find remarkable shifts in trade flows between Asia and Europe, diversion of trade within Europe, heavy shipping traffic in the Arctic and a substantial drop in Suez traffic. Projected shifts in trade also imply substantial pressure on an already threatened Arctic ecosystem.

foreign direct investment, preferential trade agreements, gravity model 1 | INTRODUCTION We estimate the potential impact of preferential trade agreements (PTAs)-and other bilateral policies that affect trade and investment-on the bilateral FDI stocks and flows between the countries signing these agreements. Our key results are based on a structural gravity model of FDI that is applied to bilateral FDI data from UNCTAD (2014), while controlling for the presence, heterogeneity and depth of preferential trade agreements (PTAs), and other time-varying bilateral policies. Starting in the 1990s, the world economy has experienced a large increase in the number of PTAs, and also in their 'depth'-measured by the number of their operative provisions. 1 While stimulating bilateral trade is the main focus of most PTAs, recent preferential trade agreements increasingly contain provisions on bilateral investment between member states. However, the impact of PTAs on the magnitude of foreign direct investments is not straightforward. Trade and FDI can either complement or substitute each other, depending on the investment motivation (i.e., horizontal and vertical), the specific industry and on the way in which the FDI provisions are shaped in the PTA. From a theoretical point of view, horizontal FDI-where firms replicate domestic activities in a foreign country-is associated with FDI substituting for trade. Thus, in the presence of horizontal FDI, PTAs are expected to decrease FDI flows. On the other hand, vertical FDI-where firms split activities between different geographical regions-creates a complementary relationship between trade, PTAs and FDI (cf. Markusen, 2002). More recently, and, in part, due to the expansion and complexity of global value chains (GVCs), other motives for FDI have been identified. For instance, export-platform FDI where MNEs produce to export to third markets (Ekholm, Forslid, & Markusen, 2007; Hanson, Mataloni, & Slaughter, 2005). Yeaple (2003) classifies mixed FDI motives as 'complex FDI'. Baldwin and Okubo 1 + jit 1 + ijt .

This study presents recently available data on the microstructure of Dutch exports and the relation between export participation and productivity at the …rm and establishment-level. We test whether recent theories of international trade with heterogeneous …rms can explain the patterns in the Dutch data. We …nd signi…cant evidence that …rms self-select into export participation, even after controlling for sector and …rm-speci…c characteristics. In general, only the most productive Dutch …rms participate in exports and foreign direct investment. In addition, we do not …nd evidence for the learning-by-exporting hypothesis, even when controlling for the …rm's distance to the international productivity frontier.

In services the activities of foreign affiliates often exceed the value of cross-border trade. A complete analysis of services liberalisation therefore requires the modelling of FDI. This paper presents the treatment of FDI in our CGE model WorldScan based on the ideas of Petri (1997) and Markusen (2002). They assume that firms establishing affiliates abroad also transfer firmspecific knowledge. Consequently, capital and products differ from existing capital and products in the host country. As an illustration, we apply this model to assess the proposals of the European Commission to open up services markets. FDI in services could increase by 20% to 35%. However, the overall economic impact is limited. Our assessment suggests that GDP in the EU25 could increase up to 0.4%. These effects could be up to 0.8% higher if foreign capital also increases the overall productivity of the services sector.