Regions are not countries: a new approach to the border effect

Rodríguez Mora, José V and David Comerford

No 9967, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use a version of the Melitz (2003) model to calibrate the magnitude and impact of the border effect, the well-known empirical regularity that trade is much lower across a national border than would otherwise be expected. We calibrate total bilateral trade frictions as a parameter and show that frictions between nation states are systematically higher than those between sub-national states or regions. Using plausible counterfactual analysis, we assess the costs of independence for Scotland, Catalonia, & the Basque Country: the intellectual experiment that is performed is to suppose that the region on independence takes on the calibrated frictions of a counterfactual independent country. If the main change that comes with the independence of regions of larger countries is that their border with their former union partner comes to resemble a normal country border, then the trade costs of the break-up of countries into smaller states (even within the EU) are significant. The border effects associated with membership of the European Union or otherwise, are much lower than the border effect differences between countries and regions. As an illustration of this we produce a potential quantification of the trade costs of a British exit from the EU. Conversely, the potential gains from the European Union achieving the sort of integration seen within a nation state, a United States of Europe, are very large.

Keywords: Border effect; Independence; Trade (search for similar items in EconPapers)
JEL-codes: F15 R13 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-geo and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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