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Borders, Trade and Welfare

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  • James E. Anderson
  • Eric van Wincoop

Abstract

International economic integration yields large potential welfare effects, even in a static constant returns competitive world economy. Our method is novel. The effect of border barriers on trade flows is often inferred from gravity models. But their rather atheoretic structure precludes welfare analysis. Computable general equilibrium models are designed for tight welfare analysis, but lack econometric foundation. Our method combines these approaches. Gravity models based on Anderson's (1979) interpretation are full general equilibrium models of a special simple sort. In Anderson and van Wincoop (NBER WP 8079, 2001) we develop and estimate this structure, then calculate the comparative static effects on trade flows of border barriers. In this paper we further deploy the model to explore the comparative statics of welfare with respect to borders, to currency unions and to NAFTA. Our NAFTA exercise does a much better job of replicating the actual trade flow changes than do computable general equilibrium models. An interesting implication is that terms of trade changes are very important, even for small' countries such as Mexico.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8515.

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Date of creation: Oct 2001
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Publication status: published as James E. Anderson, Eric van Wincoop, Charles Engel and Caroline Freund. "Borders, Trace, and Welfare." Brookings Trade Forum (2001): 207-243.
Handle: RePEc:nbr:nberwo:8515

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  1. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2329, C.E.P.R. Discussion Papers.
  2. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers, Pennsylvania State - Department of Economics 4-95-16, Pennsylvania State - Department of Economics.
  3. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 615-23, June.
  4. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  5. Charles Engel & John H. Rogers, 1998. "Relative Price Volatility: What Role Does the Border Play?," Working Papers, University of Washington, Department of Economics 0061, University of Washington, Department of Economics.
  6. Hess,Gregory D. & Wincoop,Eric van (ed.), 2000. "Intranational Macroeconomics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521661638.
  7. Jeffrey A. Frankel, 1998. "The Regionalization of the World Economy," NBER Books, National Bureau of Economic Research, Inc, number fran98-1, July.
  8. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 106-16, March.
  9. Gary Clyde Hufbauer & Jeffrey J. Schott, 1992. "North American Free Trade: Issues and Recommendations," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 71, July.
  10. Carsten Kowalczyk & Donald Davis, 1996. "Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA," NBER Working Papers 5421, National Bureau of Economic Research, Inc.
  11. 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, American Economic Association, vol. 91(2), pages 386-390, May.
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