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Endogenous Borders? The Effects of New Borders on Trade in Central Europe 1885-1933

  • Hans-Christian Heinemeyer
  • Max-Stephan Schulze
  • Nikolaus Wolf

A large literature on “border effects” in the wake of McCallum (1995) documents the massive impact of borders on trade. However, all these studies suffer from an identification problem. “Border effects” are usually identified from cross-sectional variation alone. We do not know how trade would change in response to a change in borders – the “treatment effect” of borders on trade – simply because trade flows across “future” borders are typically not documented. Nor can we rule out that there is “reverse causation”: that borders run along pre-existing trade patterns rather than shape trade flows. We exploit a natural experiment from history to explore this issue: the many dramatic border changes that were imposed and codified by the peace treaties in 1919 across Europe. We follow Ritschl and Wolf (2008) and implement Ashenfelter’s difference-in-difference estimator in levels on a large, new data set on sub-national trade flows. This allows us to trace the effects of changing borders over time and produces two key results: first, new borders have a large effect on trade. However second, the “treatment effects” of borders tend to be significantly smaller than the pure cross-sectional effects. This is so, because most of the 1919 border changes followed a pattern of trade relations across the region that was clearly visible already before 1914. Borders shape trade, and trade shapes borders.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2246.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2246
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  1. James E. Rauch & Vitor Trindade, 2002. "Ethnic Chinese Networks In International Trade," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 116-130, February.
  2. Russell Hillberry & David Hummels, 2005. "Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data," NBER Working Papers 11339, National Bureau of Economic Research, Inc.
  3. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  4. Carolyn L. Evans, 2001. "Border effects and the availability of domestic products abroad," Staff Reports 127, Federal Reserve Bank of New York.
  5. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  6. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  7. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
  8. Carolyn L. Evans, 2003. "The Economic Significance of National Border Effects," American Economic Review, American Economic Association, vol. 93(4), pages 1291-1312, September.
  9. Nitsch, Volker & Wolf, Nikolaus, 2009. "Tear Down this Wall : On the Persistence of Borders in Trade," The Warwick Economics Research Paper Series (TWERPS) 919, University of Warwick, Department of Economics.
  10. Ashenfelter, Orley C, 1978. "Estimating the Effect of Training Programs on Earnings," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 47-57, February.
  11. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  12. Ashenfelter, Orley & Card, David, 1985. "Using the Longitudinal Structure of Earnings to Estimate the Effect of Training Programs," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 648-60, November.
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  1. Historical Economic Geography

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