that measures, for each industry, the proportion of its international shipments that are transported by air. Air transport helps to bring producers closer to markets. Airplanes can reach most destinations in a day or less. By contrast, it takes weeks to ship containers by sea. However, air transport is also more expensive. Nowadays, firms use a mixture of transport modes to reduce transaction costs associated with time delays in order to maximize profits (Aizenman 2004, Hummels and Schaur 2009). The extent to which goods are transported using air modes thus represents the time sensitivity of a certain industry. We use United States import data with detailed information on transportation mode to calculate the share (Hummels 2007). Deviating from existing literature on trade costs, we use a Difference-in-Difference specification<sup>2</sup> . The approach, first adopted by Rajan and Zingales (1998), enables us to focus on cross-industry, cross-country interaction effects, i.e. the differential effects of country-level variables across industries that should be most responsive to them. Additionally, the methodology can gauge the effectiveness of time costs by showing the relative effect, though it cannot tell us the overall magnitude of the effect; by absorbing country-level variables, it is also less prone to endogeneity problems than traditional cross-country analyses.

To compare with previous studies, we first conduct a simple cross-country analysis, and find that longer delays tend to be associated with lower probabilities and intensities. Focusing on the Difference-in-Difference approach, we find that firms in more time-sensitive industries are less likely to export in countries having longer required time for exports to take place. We also find the same pattern for export intensities. Take two industries differing in time sensitivities by 18 percentage points—the standard deviation across industries—and having the same export probabilities and intensities in a country. The coefficient estimates suggest that, if the country reduces time delays by half, the differences in the export probabilities between the two countries will increase to 6 percentage points favoring the time-sensitive industry; the differences in their exports intensities will become 1.9 percentage points. The results are robust to the possibility that a country’s remoteness, endowment structure, and financial market development may have different effects across sectors as well. The results also hold when we control for the potential reverse causality problem by restricting samples to domestic SMEs, non-major exporters, and those without membership in lobbying business associations. The impact applies to firms with different productivity levels and remains significant when considering the disparities in countries’ income levels. This suggests that costs associated with time delays matter, thus confirming previous evidence on trade flows. More importantly, it implies that time is a significant determinant of comparative advantage and that it influences comparative advantage through both extensive and intensive margins.

This paper proceeds as follows: the next section discusses the related literature. Section III presents the estimation strategy. Section IV describes the data. Section V presents the empirical results and extensions. Section VI concludes.

# **II. Related Literature**

This study belongs to the growing literature on trade costs and trade facilitation. As tariff rates have come down, the trade literature increasingly recognizes the importance of non-tariff

> 2 Romalis (2004), Levchenko (2004) and Nunn (2007) take a similar approach to assess determinants of comparative advantage.

3