Topography, borders, and trade across Europe

Abstract

We create a novel data set on the European river network and for the ruggedness of trade routes between European countries and integrate these new indicators into recently developed structural gravity models. Moreover, we propose a new approach how to differentiate between contemporaneous and historical trade costs. Applying two-stage structural gravity estimations, we assess the impact of topography on trade by combining worldwide, European, and domestic trade data. While border effect estimates remain largely robust, a main part of the historical and contemporaneous trade costs usually attributed to non-contiguity can be accounted for by topography. Finally, counterfactual simulations suggest that positive effects of rivers on trade are less important than negative effects of mountains.