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Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade

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Author Info
Keith Head
Thierry Mayer

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Abstract

The measured effect of national borders on trade seems too large to be explained by the apparently small border-related trade barriers. This puzzle was first presented by McCallum (1995) and has gone on to spawn a large and growing literature on so-called border effects. We argue in this paper that, because distances are always mismeasured in the existing literature, the border effects may have been mismeasured in a way that leads to a systematic overstatement. Our goal here is to develop a correct measure of distance that would be consistent for international as well as intra-national trade flows. We show how use of the existing methods for calculating distance leads to "illusory" border and adjacency effects. We then apply our methods to data on interstate trade in the United States and inter-member trade in the European Union. We find that our new distance measure reduces the estimated border and adjacency effects but does not eliminate them. Thus, while we do not solve the border effect puzzle, we do show a way to shrink it.

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Paper provided by CEPII research center in its series Working Papers with number 2002-01.

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Date of creation: Jan 2002
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Handle: RePEc:cii:cepidt:2002-01

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Related research
Keywords: Border effect Gravity equation Distance measurement

Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Antoine Bouet & Lionel Fontagne & Mondher Mimouni & Xavier Pichot, 2001. "Market Access Maps: A Bilateral and Disaggregated Measure of Market Access," Working Papers 2001-18, CEPII research center. [Downloadable!]
  2. Agnes Benassy-Quere & Sophie Larribeau & Ronald MacDonald, 1999. "Models of Exchange Rate Expectations : Heterogeneous Evidence From Panel Data," Working Papers 1999-03, CEPII research center. [Downloadable!]
    Other versions:
  3. Michel Fouquin & Khalid Sekkat & J. Malek Mansour & Nanno Mulder & Laurence Nayman, 2001. "Sector Sensitivity to Exchange Rate Fluctuations," Working Papers 2001-11, CEPII research center. [Downloadable!]
  4. Dominique Pianelli & Georges Sokoloff, 1999. "Groupe d'echanges et de reflexion sur la Caspienne," Working Papers 1999-15, CEPII research center. [Downloadable!]
  5. Sebastien Jean, 2000. "Syndrome, miracle, modele polder et autres specificites neerlandaises," Working Papers 2000-12, CEPII research center. [Downloadable!]
  6. Agnes Benassy-Quere & Lionel Fontagne & Amina Lahreche-Revil, 2000. "Foreign Direct Investment and the Prospects for Tax Co-Ordination in Europe," Working Papers 2000-06, CEPII research center. [Downloadable!]
  7. Agnes Benassy-Quere & Lionel Fontagne & Amina Lahreche-Revil, 1999. "Exchange rate strategies in the competition for attracting FDI," Working Papers 1999-16, CEPII research center. [Downloadable!]
    Other versions:
  8. Lionel Fontagne & Michael Freudenberg & Deniz Unal-Kesenci, 1999. "Haute technologie et echelles de qualite : de fortes asymetries en Europe," Working Papers 1999-08, CEPII research center. [Downloadable!]
  9. Isabelle Bensidoun & Guillaume Gaulier & Deniz Unal-Kesenci, 2001. "The Nature of Specialization Matters for Growth: an Empirical Investigation," Working Papers 2001-13, CEPII research center. [Downloadable!]
  10. Keith Head & Thierry Mayer, 2001. "Effet frontiere, integration economique et "Forteresse Europe"," Working Papers 2001-06, CEPII research center. [Downloadable!]
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