IMF Economic Review

, Volume 65, Issue 2, pp 365–396 | Cite as

Do Borders Really Slash Trade? A Meta-Analysis

Article

Abstract

National borders reduce trade, but most estimates of the border effect seem puzzlingly large. We show that major methodological innovations of the last decade combine to shrink the border effect to a one-third reduction in international trade flows worldwide. For the computation we collect 1,271 estimates of the border effect reported in 61 studies, codify 32 aspects of study design that may influence the estimates, and use Bayesian model averaging to take into account model uncertainty in meta-analysis. Our results suggest that methods systematically affect the estimated border effects. Especially important is the level of aggregation, measurement of internal and external distance, control for multilateral resistance, and treatment of zero trade flows. We also find that the magnitude of the border effect is associated with country characteristics, such as size and income.

JEL

F14 F15 

References

  1. Anderson, J.E., C.A. Milot, and Y. V. Yotov, 2014, “How Much Does Geography Deflect Services Trade? Canadian Answers,” International Economic Review, Vol. 55, No. 3, pp. 791–818.CrossRefGoogle Scholar
  2. Anderson, J.E. and E. van Wincoop, 2003, “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review, Vol. 93, No. 1, pp. 170–92.CrossRefGoogle Scholar
  3. ——— , 2004, “Trade Costs,” Journal of Economic Literature, Vol. 42, No. 3, pp. 691–751.CrossRefGoogle Scholar
  4. Anderson, J.E. and Y.V. Yotov, 2010, “The Changing Incidence of Geography,” American Economic Review, Vol. 100, No. 5, pp. 2157–86.CrossRefGoogle Scholar
  5. Anderson, M. and S. Smith, 1999, “Canadian Provinces in World Trade: Engagement and Detachment,” Canadian Journal of Economics, Vol. 32, No. 1, pp. 22–38.CrossRefGoogle Scholar
  6. Ashenfelter, O., C. Harmon, and H. Oosterbeek, 199, “A Review of Estimates of the Schooling/Earnings Relationship, with Tests for Publication Bias,” Labour Economics, Vol. 6, No. 4, pp. 453–70.CrossRefGoogle Scholar
  7. Baier, S.L. and J.H. Bergstrand, 2009, “Bonus Vetus OLS: A Simple Method for Approximating International Trade-Cost Effects Using the Gravity Equation,” Journal of International Economics, Vol. 77, No. 1, pp. 77–85.CrossRefGoogle Scholar
  8. Baldwin, R. and D. Taglioni, 2007, “Trade Effects of the Euro: a Comparison of Estimators,” Journal of Economic Integration, Vol. 22, pp. 780–818.CrossRefGoogle Scholar
  9. Balistreri, E.J. and R.H. Hillberry, 2007, “Structural Estimation and the Border Puzzle,” Journal of International Economics, Vol. 72, No. 2, pp. 451–63.CrossRefGoogle Scholar
  10. Behrens, K., C. Ertur, and W. Koch, 2012, “‘Dual’ Gravity: Using Spatial Econometrics To Control For Multilateral Resistance,” Journal of Applied Econometrics, Vol. 27, No. 5, pp. 773–94.CrossRefGoogle Scholar
  11. Braconier, H. and M. Pisu, 2013, “Road Connectivity and the Border Effect: Evidence from Europe,” OECD Economics Department Working Papers 1073, OECD.Google Scholar
  12. Cafiso, G., 2011, “Sectoral Border Effects and the Geographic Concentration of Production,” Review of World Economics, Vol. 147, No. 3, pp. 543–66.CrossRefGoogle Scholar
  13. Cameron, A.C., J.B. Gelbach, and D.L. Miller, 2011, “Robust Inference With Multiway Clustering,” Journal of Business & Economic Statistics, Vol. 29, No. 2, pp. 238–49.CrossRefGoogle Scholar
  14. Card, D. and A.B. Krueger, 1995, “Time-Series Minimum-Wage Studies: A Meta-Analysis,” American Economic Review, Vol. 85, No. 2, pp. 238–43.Google Scholar
  15. Chetty, R., A. Guren, D. Manoli, and A. Weber, 2011, “Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins,” American Economic Review, Vol. 10, No. 3, pp. 471–75.CrossRefGoogle Scholar
  16. da Silva, O.M., F.M. de Almeida, and B.M. de Oliviera, 2007, “ComTrcio internacional “x” intranacional no Brasil: medindo o efeito-fronteira,” Nova Economia, Vol. 17, No. 3, pp. 427–39.CrossRefGoogle Scholar
  17. Dekle, R., J. Eaton, and S. Kortum, 2007, “Unbalanced Trade,” American Economic Review, Vol. 97, No. 2, pp. 351–55.CrossRefGoogle Scholar
  18. DeLong, J.B. and K. Lang, 1992, “Are All Economic Hypotheses False?” Journal of Political Economy, Vol. 100, No. 6, pp. 1257–72.CrossRefGoogle Scholar
  19. Disdier, A.-C. and K. Head, 2008, “The Puzzling Persistence of the Distance Effect on Bilateral Trade,” The Review of Economics and Statistics, Vol. 90, No. 1, pp. 37–48.CrossRefGoogle Scholar
  20. Doucouliagos, H. and T.D. Stanley, 2013, “Are All Economic Facts Greatly Exaggerated? Theory Competition and Selectivity,” Journal of Economic Surveys, Vol. 27, No. 2, pp. 316–39.CrossRefGoogle Scholar
  21. Egger, M., G.D. Smith, M. Scheider, and C. Minder, 1997, “Bias in Meta-Analysis Detected by a Simple, Graphical Test,” British Medical Journal, Vol. 316, pp. 629–34.CrossRefGoogle Scholar
  22. Eicher, T.S., C. Papageorgiou, and A.E. Raftery, 2011, “Default Priors and Predictive Performance in Bayesian Model Averaging, with Application to Growth Determinants,” Journal of Applied Econometrics, Vol. 26, No. 1, pp. 30–55.CrossRefGoogle Scholar
  23. Feenstra, R.C., 2002, “Border Effects and the Gravity Equation: Consistent Methods for Estimation,” Scottish Journal of Political Economy, Vol. 49, No. 5, pp. 491–506.CrossRefGoogle Scholar
  24. Feenstra, R.C., P.A. Luck, M. Obstfeld, and K.N. Russ, 2014, “In Search of the Armington Elasticity,” NBER Working Papers 20063, National Bureau of Economic Research, Inc.Google Scholar
  25. Feldkircher, M. and S. Zeugner, 2009, “Benchmark Priors Revisited: On Adaptive Shrinkage and the Supermodel Effect in Bayesian Model Averaging,” IMF Working Papers 09/202, International Monetary Fund.Google Scholar
  26. Havranek, T., 2015, “Measuring Intertemporal Substitution: The Importance Of Method Choices And Selective Reporting,” Journal of the European Economic Association, Vol. 13, No. 6, pp. 1180–1204.CrossRefGoogle Scholar
  27. Havranek, T. and Z. Irsova, 2011, “Estimating Vertical Spillovers from FDI: Why Results Vary and What the True Effect Is,” Journal of International Economics, Vol. 85, No. 2, pp. 234–44.CrossRefGoogle Scholar
  28. ——— , 2012, “Publication Bias in the Literature on Spillovers from Foreign Direct Investment. ” Journal of Development Studies, Vol. 48, No. 10, pp. 1375–96.CrossRefGoogle Scholar
  29. Havranek, T., M. Rusnak, and A. Sokolova, 2015, “Habit Formation in Consumption: A Meta-Analysis,” Working Papers 2015/03, Czech National Bank, Research Department.Google Scholar
  30. Havranek, T. and A. Sokolova, 2016, “Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say ‘Probably Not’,” Working paper, Czech National Bank.Google Scholar
  31. Head, K. and T. Mayer, 2000, “Non-Europe: The magnitude and causes of market fragmentation in the EU,” Review of World Economics, Vol. 136, No. 2, pp. 284–314.CrossRefGoogle Scholar
  32. ——— , 2010, “Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade,” in The Gravity Model in International Trade: Advances and Applications, ed. by P.A.G. van Bergeijk and S. Brakman. Cambridge: Cambridge University Press, pp. 165–92.Google Scholar
  33. ——— , 2014, “Gravity Equations: Workhorse, Toolkit, and Cookbook,” in Handbook of International Economics,vol. 4, , ed. by K. Rogoff. Amsrerdam: Elsevier, pp. 131–95.Google Scholar
  34. Hillberry, R. H., 2002, “Aggregation bias, compositional change, and the border effect,” Canadian Journal of Economics, Vol. 35, No. 3, pp. 517–30.CrossRefGoogle Scholar
  35. Irsova, Z. and T. Havranek, 2013, “Determinants of Horizontal Spillovers from FDI: Evidence from a Large Meta-Analysis,” World Development, Vol. 42, No. 1, pp. 1–15.CrossRefGoogle Scholar
  36. Kee, H.L., A. Nicita, and M. Olarreaga, 2009, “Estimating Trade Restrictiveness Indices,” Economic Journal, Vol. 119, No. 534, pp. 172–99.CrossRefGoogle Scholar
  37. McCallum, J., 1995, “National Borders Matter: Canada-U.S. Regional Trade Patterns,” American Economic Review, Vol. 85, No. 3, pp. 615–23.Google Scholar
  38. Nitsch, V., 2000, “National borders and international trade: evidence from the European Union,” Canadian Journal of Economics, Vol. 33, No. 4, pp. 1091–1105.CrossRefGoogle Scholar
  39. Obstfeld, M. and K. Rogoff, 2001, “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?” In NBER Macroeconomics Annual 2000, Vol. 15, NBER Chapters, pp. 339–412.Google Scholar
  40. Parsley, D.C. and S.-J. Wei, 2001, “Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography,” Journal of International Economics, Vol. 55, No. 1, pp. 87–105.CrossRefGoogle Scholar
  41. Raftery, A.E., D. Madigan, and J.A. Hoeting, 1997, “Bayesian Model Averaging for Linear Regression Models,” Journal of the American Statistical Association, Vol. 92, pp. 179–91.CrossRefGoogle Scholar
  42. Rose, A.K., 2000, “One Money, One Market: The Effect of Common Currencies on Trade,” Economic Policy, Vol. 15, No. 30, pp. 7–46.CrossRefGoogle Scholar
  43. Rosenthal, R., 1979, “The ‘File Drawer Problem’ and Tolerance for Null Results,” Psychological Bulletin, Vol. 86, pp. 638–41.CrossRefGoogle Scholar
  44. Schwarz, J., 2012, “Impact of Institutions on Cross-Border Price Dispersion,” Review of World Economics (Weltwirtschaftliches Archiv), Vol. 148, No. 4, pp. 617–45.CrossRefGoogle Scholar
  45. Siegfried, J.J., 2012, “Minutes of the Meeting of the Executive Committee: Chicago, IL, January 5, 2012,” American Economic Review, Vol. 102, No. 3, pp. 645–52.CrossRefGoogle Scholar
  46. Silva, J.M.C.S. and S. Tenreyro, 2006, “The Log of Gravity,” The Review of Economics and Statistics, Vol. 88, No. 4, pp. 641–58.CrossRefGoogle Scholar
  47. Stanley, T.D., 2001, “Wheat from Chaff: Meta-Analysis as Quantitative Literature Review,” Journal of Economic Perspectives, Vol. 15, No. 3, pp. 131–50.CrossRefGoogle Scholar
  48. ——— , 2005, “Beyond Publication Bias,” Journal of Economic Surveys, Vol. 19, No. 3, pp. 309–45.CrossRefGoogle Scholar
  49. Stanley, T.D. and H. Doucouliagos, 2010, “Picture This: A Simple Graph That Reveals Much Ado About Research,” Journal of Economic Surveys, Vol. 24, No. 1, pp. 170–91.CrossRefGoogle Scholar
  50. Tukey, J.W., 1977, Exploratory Data Analysis. Reading, MA: Addison—Wesley.Google Scholar
  51. Wei, S.-J, 1996, “Intra-National versus, International Trade: How Stubborn are Nations in Global Integration?” NBER Working Papers 5531, National Bureau of Economic Research, Inc.Google Scholar
  52. Wilson, C. M., 2015, “Information Matters: Comparing Some Theoretical Determinants of Border Effects in Trade,” Discussion Paper Series 2015/02, Department of Economics, Loughborough University.Google Scholar
  53. Wolf, H.C., 2000, “Intranational Home Bias In Trade,” The Review of Economics and Statistics, Vol. 82, No. 4, pp. 555–63.CrossRefGoogle Scholar

Copyright information

© International Monetary Fund 2016

Authors and Affiliations

  1. 1.Research DepartmentCzech National BankPragueCzech Republic
  2. 2.Charles UniversityPragueCzech Republic

Personalised recommendations