Melting Ice Caps and the Economic Impact of Opening the Northern Sea Route
We acknowledge support for this research under the European Union FP7 project ‘Impacts Quantification of Global Changes (GLOBAL-IQ)’, grant agreement no. 266992, and the Swiss National Fonds NCCR Trade Regulation project. Ana-Maria Vasilache-Freudenthaler provided excellent research assistance. This article has benefited from the comments and suggestions by Richard Baldwin, Peter Egger, Rikard Forslid, Henri de Groot, Thomas Hertel, Douglas Nelson, Karen Helen Ulltveit-Moe and participants at the 16th Annual Conference on Global Economic Analysis in Shanghai (June 2013) and the Annual Global IQ meeting in Rome (September 2013), ETSG Fifteenth Annual Conference in Birmingham (September 2013) and the Fifth Villars Research Workshop on International Trade (February 2014).
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.