Regional trade and “the medicine line”: The national border effect in U.S. commodity flow data

Abstract

The role of national borders in the international economy has been a topic of widespread public discussion in recent years. The conventional wisdom on the topic is that in an increasingly integrated global economy with relatively low formal trade barriers, national borders are no longer important inhibitors of trade. McCallum (1995) cast some doubt on this belief when he found that, after adjusting for economic size and geographic distance, trade among Canadian provinces was more than twenty times greater than trade between those same provinces and U.S. states. The 1993 Commodity Flow Survey (CFS) provides an unprecedented opportunity to verify these surprising results, as well as to investigate subsequent questions, such as why the border matters, and how it affects economic welfare. This paper reviews the existing literature on the geography of trade flows, describes the CFS, and attempts to verify the McCallum result at the aggregate level. Despite a number of a priori reasons to believe otherwise, the author finds that CFS estimates of the “border effect” are almost exactly equivalent to those estimated by McCallum.