Estimating Border Effects: The Impact of Spatial Aggregation

Abstract

Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which initially symmetric micro regions are combined to form aggregated macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that larger countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the relative cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. This mechanism leads to border effect heterogeneity and is independent of multilateral resistance effects in general equilibrium. Even if no border frictions exist at the micro level, gravity estimation on aggregate data can still produce large border effects. We test our theory on domestic and international trade flows at the level of U.S. states. Our results confirm the model's predictions, with quantitatively large effects.

Informality, Trade Facilitation, and Trade Flows: Evidence from Guinea-Bissau

“…Recently, Coughlin and Novy (2021) show that the border effect is sensitive to aggregation where larger regions or countries are associated with smaller border effects.…”

Spain, Split and Talk: Quantifying Regional Independence

“…More recently, some studies highlight regional border effects, which reduce trade between regions relative to regional domestic sales. Estimating border effects for different samples including trade flows for US states, Coughlin and Novy (2021) demonstrate heterogeneous border effects depending on the size of the region. In their US-only sample, they combine domestic trade flows with inter-state flows, while in their multi-country sample, they combine inter-state flows with international trade flows from US states to the 50 largest US export destinations.…”

Gravity at Sixty: The Workhorse Model of Trade

“…As usual, most papers still apply the gravity model to address new questions or to improve on existing analysis by relying on better methods or using better data. Some recent gravity applications include analysis of the impact of COVID (Baldwin and Dingel (2021), Cunat and Zymek (2020), and Sforza and Steininger (2020)), preferential trade agreements (Egger and Tarlea (2021)), border effects (Coughlin and Novy (2021)), tariffs (Fontagné et al (2020)), language (Gurevich et al (2021)), trade imbalances (Felbermayr and Yotov (2021)), heterogeneous trade cost elasticities (Chen and Novy (2021)), time as a trade barrier (Oberhofer et al (2021)), experience (Dutt et al (2020)), and value added taxes (Benzarti and Tazhitdinova (2021) and Schneider et al ( 2021)). Stricter reliance on theory opens new opportunities to estimate the effects of country-specific determinants of trade (Beverelli et al (2018) andFreeman et al (2021)) and non-discriminatory trade policies (Heid et al (2021)).…”