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.
Similar content being viewed by others
References
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.
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.
——— , 2004, “Trade Costs,” Journal of Economic Literature, Vol. 42, No. 3, pp. 691–751.
Anderson, J.E. and Y.V. Yotov, 2010, “The Changing Incidence of Geography,” American Economic Review, Vol. 100, No. 5, pp. 2157–86.
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.
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.
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.
Baldwin, R. and D. Taglioni, 2007, “Trade Effects of the Euro: a Comparison of Estimators,” Journal of Economic Integration, Vol. 22, pp. 780–818.
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.
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.
Braconier, H. and M. Pisu, 2013, “Road Connectivity and the Border Effect: Evidence from Europe,” OECD Economics Department Working Papers 1073, OECD.
Cafiso, G., 2011, “Sectoral Border Effects and the Geographic Concentration of Production,” Review of World Economics, Vol. 147, No. 3, pp. 543–66.
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.
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.
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.
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.
Dekle, R., J. Eaton, and S. Kortum, 2007, “Unbalanced Trade,” American Economic Review, Vol. 97, No. 2, pp. 351–55.
DeLong, J.B. and K. Lang, 1992, “Are All Economic Hypotheses False?” Journal of Political Economy, Vol. 100, No. 6, pp. 1257–72.
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.
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.
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.
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.
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.
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.
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.
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.
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.
——— , 2012, “Publication Bias in the Literature on Spillovers from Foreign Direct Investment. ” Journal of Development Studies, Vol. 48, No. 10, pp. 1375–96.
Havranek, T., M. Rusnak, and A. Sokolova, 2015, “Habit Formation in Consumption: A Meta-Analysis,” Working Papers 2015/03, Czech National Bank, Research Department.
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.
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.
——— , 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.
——— , 2014, “Gravity Equations: Workhorse, Toolkit, and Cookbook,” in Handbook of International Economics,vol. 4, , ed. by K. Rogoff. Amsrerdam: Elsevier, pp. 131–95.
Hillberry, R. H., 2002, “Aggregation bias, compositional change, and the border effect,” Canadian Journal of Economics, Vol. 35, No. 3, pp. 517–30.
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.
Kee, H.L., A. Nicita, and M. Olarreaga, 2009, “Estimating Trade Restrictiveness Indices,” Economic Journal, Vol. 119, No. 534, pp. 172–99.
McCallum, J., 1995, “National Borders Matter: Canada-U.S. Regional Trade Patterns,” American Economic Review, Vol. 85, No. 3, pp. 615–23.
Nitsch, V., 2000, “National borders and international trade: evidence from the European Union,” Canadian Journal of Economics, Vol. 33, No. 4, pp. 1091–1105.
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.
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.
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.
Rose, A.K., 2000, “One Money, One Market: The Effect of Common Currencies on Trade,” Economic Policy, Vol. 15, No. 30, pp. 7–46.
Rosenthal, R., 1979, “The ‘File Drawer Problem’ and Tolerance for Null Results,” Psychological Bulletin, Vol. 86, pp. 638–41.
Schwarz, J., 2012, “Impact of Institutions on Cross-Border Price Dispersion,” Review of World Economics (Weltwirtschaftliches Archiv), Vol. 148, No. 4, pp. 617–45.
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.
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.
Stanley, T.D., 2001, “Wheat from Chaff: Meta-Analysis as Quantitative Literature Review,” Journal of Economic Perspectives, Vol. 15, No. 3, pp. 131–50.
——— , 2005, “Beyond Publication Bias,” Journal of Economic Surveys, Vol. 19, No. 3, pp. 309–45.
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.
Tukey, J.W., 1977, Exploratory Data Analysis. Reading, MA: Addison—Wesley.
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.
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.
Wolf, H.C., 2000, “Intranational Home Bias In Trade,” The Review of Economics and Statistics, Vol. 82, No. 4, pp. 555–63.
Author information
Authors and Affiliations
Corresponding author
Additional information
Supplementary information accompanies this article on the IMF Economic Review website (www.palgrave.com/journals)
*Tomas Havranek is Senior Economist and Advisor to the Board at the Research Department of the Czech National Bank and Associate Professor at Charles University, Prague; his email address is: tomas.havranek@cnb.cz. Zuzana Irsova is Post-Doc Researcher at Charles University, Prague; her email address is: zuzana.irsova@ies-prague.org. We thank Jan Babecky, Oxana Babecka-Kucharcukova, Anne-Celia Disdier, Jarko Fidrmuc, Keith Head, Jiri Schwarz, Tom Stanley, Borek Vasicek, Diana Zigraiova, and two anonymous referees for their helpful comments. Havranek acknowledges the support from the Czech Science Foundation (Grant #15-02411S); Irsova acknowledges the support from the Czech Science Foundation (Grant #16-00027S). The views expressed here are ours and not necessarily those of the Czech National Bank.
An online appendix with data and code is available at http://meta-analysis.cz/border.