Gravity, Borders, and Regionalism: A Canada–US Sub-National Analysis

Abstract

ABSTRACTThis article examines the extent to which trade costs influence the magnitude and direction of both east-west and north-south trade in Canada and the United States. With the aid of an alternative framework which pays attention to key estimation issues in the gravity literature, we garner further evidence in support of a decline, over time, in the home bias syndrome. Our results uphold the Linder hypothesis but refute the Heckscher-Ohlin factor endowment proposition. In light of the recently modernized trilateral trade agreement in North America, we conclude with policy lessons on buffering the Canadian economy from asymmetric trade shocks from its southern neighbor.