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

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Listed author(s):
  • Nitsch, Volker

    (Technische Universität Darmstadt)

  • Wolf, Nikolaus

    (University of Warwick and CEPR)

Abstract

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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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2009/twerp_919.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 919.

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Date of creation: 2009
Handle: RePEc:wrk:warwec:919
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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Keywords: integration ; home bias ; globalization JEL Codes: F14 ; F15;

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Find related papers by JEL classification:
  • F14 - International Economics - - Trade - - - Empirical Studies of Trade
  • F15 - International Economics - - Trade - - - Economic Integration

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  1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
  2. Stephen J. Redding & Daniel M. Sturm, 2008. "The Costs of Remoteness: Evidence from German Division and Reunification," American Economic Review, American Economic Association, vol. 98(5), pages 1766-1797, December.
  3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  4. Wolf, Nikolaus, 2009. "Was Germany Ever United? Evidence from Intra- and International Trade, 1885–1933," The Journal of Economic History, Cambridge University Press, vol. 69(03), pages 846-881, September.
  5. 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.
  6. 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.
  7. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
  8. 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.
  9. Chen, Natalie, 2004. "Intra-national versus international trade in the European Union: why do national borders matter?," Journal of International Economics, Elsevier, vol. 63(1), pages 93-118, May.
  10. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  11. Hillberry, Russell & Hummels, David, 2008. "Trade responses to geographic frictions: A decomposition using micro-data," European Economic Review, Elsevier, vol. 52(3), pages 527-550, April.
  12. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-623, June.
  13. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  14. 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.
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