14 Feb 2017, CPB Discussion Paper 307

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

by Eddy Bekkers, Joseph F. Francois, Hugo Rojas-Romagosa

Abstract

A consequence of melting Arctic ice caps is the commercial viability of theNorthern Sea Route, connecting North-East Asia with North-Western Europe.This will represent a sizeable reduction in shipping distances and a decrease inthe average transportation days by around one-third compared to the currentlyused Southern Sea Route. We examine the economic impact of the openingof the Northern Sea Route in a multi-sector Eaton and Kortum model withintermediate linkages. This includes a remarkable shift of bilateral trade flowsbetween Asia and Europe, diversion of trade within Europe, heavy shippingtraffic in the Arctic, and a substantial drop in traffic through Suez. Theseglobal trade changes are reflected in real income and welfare effects for thecountries involved. The estimated redirection of trade has also major geopolit-ical implications: the reorganisation of global supply chains within Europe andbetween Europe and Asia, and the highlighted political interest and environ-mental pressure on the Arctic.

Keywords:Northern Sea Route, trade forecasting, gravity model, CGE models,trade and emissions

JEL Classification:R4, F17, C2, D58, F18

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