TRADE IN POLARIZED AMERICA: THE BORDER EFFECT BETWEEN RED STATES AND BLUE STATES

Abstract

Political and cultural polarization in the United States is widely discussed, but does it relate to any economic disconnection among states? We estimate the “border” effect between Red and Blue states using the gravity equation with a nonlinear generalized method of moments estimator to simultaneously overcome the problems associated with endogeneity, cross‐state price differences, and zero‐trade flow. The border effect is robustly confirmed for the 2000s, while not so robustly detected for the 1990s. Notably, in 2007, the border reduces trade between Red and Blue states to approximately 75% of the trade within each set of states. This estimated border effect is much smaller than the United States–Canada national border effect estimated by Anderson and van Wincoop (2003), and by Feenstra (2002), yet is comparable to the border effect that Nitsch and Wolf (2009) find for the former West and East Germanies approximately 10 years after reunification. While the border effect in Germany after reunification is decreasing, the border effect between the Red and Blue states is emerging. We also find the border effect is more significant for consumption, rather than intermediate, goods. The border effect is an important indicator for a potential dismantling of the economic connectivity in the United States. (JEL D72, F10, F15, R1)