DP11670 Melting Ice Caps and the Economic Impact of Opening the Northern Sea Route

Author(s): Eddy Bekkers, Joseph Francois, Hugo Rojas-Romagosa
Publication Date: November 2016
Keyword(s): gravity model, Northern Sea Route, quantitative trade models, trade and emissions, trade forecasting
JEL(s): C2, D58, F17, F18, R4
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11670

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.