Abstract
Abstract Trade between regions separated by a sea border is affected by specific transport costs that have not been considered by the border effects literature. Among these are the existence of a time barrier, the need to combine different transport modes, or to pay fees and taxes for the use of public infrastructures such as ports and airports. The empirical strategy used to estimate the “island effect” proceeds in two steps: first an augmented gravity model is estimated for mainland and island regions; then a Blinder–Oaxaca decomposition is applied to the gravity estimation results in order to disentangle the distance and border effects for those regions. Results show that island regions are at a substantial disadvantage compared to continental regions, which is due to the higher and non-linear effect of distance coefficients.
Highlights
There is a well-established literature on border effects covering trade between regions separated by a land border;1 that literature has not so far considered the case of regions separated by a sea border
First an augmented gravity model that includes all types of trade costs incurred by island regions within their country of origin is estimated for mainland and island regions; a BlinderOaxaca decomposition is applied to the gravity estimation results in order to disentangle the distance and border effects for those regions, net of all other factors controlled for in the gravity estimations
Results show that island regions are at a substantial disadvantage compared to continental regions, but their trade disadvantage is due to a greater extent to the fixed cost imposed by the lack of adjacency originated by the sea border rather than to the variable cost of higher average distance
Summary
There is a well-established literature on border effects covering trade between regions separated by a land border; that literature has not so far considered the case of regions separated by a sea border This is an important distinction because, whilst the former is typically a political border that affects adjacent regions belonging to different countries and can be reduced by free trade agreements, the latter is a geographical border that affects regions within the same country and cannot be reduced in a similar way. Results show that island regions are at a substantial disadvantage compared to continental regions, but their trade disadvantage is due to a greater extent to the fixed cost imposed by the lack of adjacency originated by the sea border rather than to the variable cost of higher average distance
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