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Borders, Common Currencies, Trade, and Welfare: What Can We Learn from the Evidence?

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Recent evidence indicates that the intensity of economic exchange within and across borders is significantly different: linkages are much tighter within, than among, nation-states. These findings, however, do not necessarily imply that borders and separate national currencies represent significant barriers to trade that should be removed, since the evidence is also consistent with the alternative hypothesis, that domestic exchange is more efficient because domestic producers are better able to satisfy the requirements of local consumers, owing to common tastes and institutions and the existence of local information and social networks. Focusing primarily on trade linkages within and between Canada and the United States, the authors review the evidence on the extent to which national borders lessen the intensity of international economic linkages, primarily trade in goods and services, and the effects on domestic welfare. They also examine the evidence on the impact of common currencies on trade and welfare. They determine that, since the empirical models employed to date in this research cannot distinguish between alternative explanations of the evidence, it is not yet possible to draw firm conclusions for policy-making.

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  • John F. Helliwell & Lawrence L. Schembri, 2005. "Borders, Common Currencies, Trade, and Welfare: What Can We Learn from the Evidence?," Bank of Canada Review, Bank of Canada, vol. 2005(Spring), pages 19-33.
    • Handle: RePEc:bca:bcarev:v:2005:y:2005:i:spring05:p:19-33
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    1. Thom, Rodney & Walsh, Brendan, 2002. "The effect of a currency union on trade: Lessons from the Irish experience," European Economic Review, Elsevier, vol. 46(6), pages 1111-1123, June.
    2. Sinn, Stefan, 1992. "Saving-Investment Correlations and Capital Mobility: On the Evidence from Annual Data," Economic Journal, Royal Economic Society, vol. 102(414), pages 1162-1170, September.
    3. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
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    1. Fernando Borraz & Alberto Cavallo & Roberto Rigobon & Leandro Zipitria, 2016. "Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 3-35, January.
    2. Mr. Itai Agur, 2016. "Products and Provinces: A Disaggregated Panel Analysis of Canada’s Manufacturing Exports," IMF Working Papers 2016/193, International Monetary Fund.
    3. Dennis Novy, 2013. "Gravity Redux: Measuring International Trade Costs With Panel Data," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 101-121, January.
    4. Bröcker, Johannes & Korzhenevych, Artem & Riekhof, Marie-Catherine, 2011. "Predicting freight flows in a globalising world," Research in Transportation Economics, Elsevier, vol. 31(1), pages 37-44.
    5. Farrukh Suvankulov, 2015. "Revisiting National Border Effects in Foreign Trade in Goods of Canadian Provinces," Staff Working Papers 15-28, Bank of Canada.

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