STEG Working Paper

Entrepôt: Hubs, Scale, and Trade Costs

Sharat Ganapati, Woan Foong Wong, and Oren Ziv

We study the global trade network and quantify its trade and welfare impact. We document that the trade network is a hub-and-spoke system where 80% of trade is shipped indirectly, nearly all via entrepôts - major hubs that facilitate trade between many origins and destinations. We estimate indirect-shipping consistent trade costs using a model where shipments can be sent indirectly through an endogenous transport network and develop a geography-based instrument to estimate scale economies in shipping. Network and scale effects in the trade network propagate local trade cost changes globally. Even when initial trade cost changes are not transportation-related, these endogenous channels alter the magnitude and distribution of welfare impacts, particularly for entrepôts. Counterfactual infrastructure improvements at entrepôts generate ten times the global welfare impact relative to non-entrepôts.