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Tear Down this Wall: On the Persistence of Borders in Trade

  • Nitsch, Volker
  • Wolf, Nikolaus

Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade both in the cross-section and over time. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. The evolution of intra-German trade flows after reunification then provides new insights for both the globalization and border effects literatures. Our estimation results show a remarkable persistence in intra-German trade patterns along the former East-West border; political integration is not rapidly followed by economic integration. Instead, we estimate that it takes at least one generation (between 33 and 40 years or more) to remove the impact of political borders on trade. This finding strongly suggests that border effects are neither statistical artefacts nor mainly driven by administrative or "red tape" barriers to trade, but arise from economic fundamentals.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7545.

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Date of creation: Nov 2009
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Handle: RePEc:cpr:ceprdp:7545
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  1. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  2. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
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  4. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
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  8. Stephen Redding & Daniel M. Sturm, 2005. "The costs of remoteness: evidence from German division and reunification," LSE Research Online Documents on Economics 51613, London School of Economics and Political Science, LSE Library.
  9. Volker Nitsch, 2000. "National borders and international trade: evidence from the European Union," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 1091-1105, November.
  10. Max-Stephan Schulze & Nikolaus Wolf, 2009. "On the origins of border effects: insights from the Habsburg Empire," Journal of Economic Geography, Oxford University Press, vol. 9(1), pages 117-136, January.
  11. Combes, Pierre-Philippe & Lafourcade, Miren & Mayer, Thierry, 2005. "The trade-creating effects of business and social networks: evidence from France," Journal of International Economics, Elsevier, vol. 66(1), pages 1-29, May.
  12. Chen, Natalie, 2002. "Intra-national versus International Trade in the European Union: Why do National Borders Matter?," CEPR Discussion Papers 3407, C.E.P.R. Discussion Papers.
  13. Hans Christian Heinemeyer, 2007. "The treatment effect of borders on trade. The great war and the disintegration of Central Europe," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 1(3), pages 177-210, October.
  14. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
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