Working Paper: CEPR ID: DP3750
Authors: Pierre-Philippe Combes; Miren Lafourcade; Thierry Mayer
Abstract: McCallum (1995) shows in an influential contribution that, even when controlling for the impact of bilateral distance and region size, borders sharply reduce trade volumes between countries. We use in this Paper data on bilateral trade flows between 94 French regions, for 10 industries and two years (1978 and 1993) to study the magnitude and variations over time of trade impediments, both distance-related and (administrative) border-related. We focus on assessing the role that business and social networks can play in shaping trade patterns and explaining the border effect puzzle.Using a structural econometric approach, we show that intranational administrative borders significantly affect trade patterns inside France. The impact is of the same order of magnitude as in Wolf (2000) for trade inside the United States. We show that more than 60% of these (puzzling) intranational border effects can be explained by the composition of local labour force in terms of birth place (social networks) and by inter-plants connections (business networks). In addition, controlling for these network effects reduces the impact of transport cost on trade flows by a comparable factor. Thus, business and social networks that help to reduce informational trade barriers are shown to be strong determinants of trade patterns and to explain a large part of the border puzzle.
Keywords: border effects; gravity; networks
JEL Codes: F12; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intranational administrative borders (F55) | trade volumes (F10) |
| composition of local labor force in terms of birthplace and social networks (J69) | trade volumes (F10) |
| social and business networks (Z13) | informational trade barriers (F13) |
| social and business networks (Z13) | trade patterns (F10) |
| controlling for network effects (D85) | impact of transport costs on trade flows (R41) |