Rising trade costs? Agglomeration and trade with endogenous transaction costs

While transport costs have fallen, the empirical evidence also points at rising total trade costs. In a model of industry location with endogenous transaction costs that seeks to replicate features from the machinery industry, we show how and under which conditions a decline in transport costs can lead to an increase in the total cost of trade. The subtle relationship between (endogenous) transport costs and the sensitivity of trade to distance is also explored