Economic Integration Agreements, Border Effects, and Distance Elasticities in the Gravity Equation

By J. Bergstrand, Mario Larch, Yoto V. Yotov. Social Science Research Network, 2015

390 citations recorded by the source corpus.

Using a novel common econometric specification, we examine the measurement of three important effects in international trade that historically have been addressed largely separately: the (partial) effects on trade of economic integration agreements, national borders, and bilateral distance. First, recent studies focusing on precise and unbiased estimates of effects of economic integration agreements (EIAs) on members’ trade may be biased upward owing to inadequate control for exogenous unobservable country-pair-specific technological innovations (decreasing the costs of international relative to intranational trade); we find evidence of this bias using a properly specified gravity equation. Second, our novel methodology yields economically plausible and statistically significant estimates of the declining effect of “national borders” on world trade, now accounting for endogenous EIA formations and unobserved country-pair heterogeneity in initial levels. Third, we confirm recent evidence providing a solution to the “distance-elasticity puzzle,” but show that these estimates of the declining effect of distance on international trade are biased upward by not accounting for endogenous EIA formations and unobserved country-pair heterogeneity. We show that these results are robust to a battery of sensitivity analyses allowing for phase-ins of agreements, lagged terms-of-trade effects, reverse causality, various estimation techniques, disaggregation, inclusion of intranational trade, and accounting for firm-heterogeneity and country-selection bias.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/95ab8c60c6e82ba483e7ada6ad8441d4a60ea5f4

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Citations in the corpus

An Advanced Guide to Trade Policy Analysis: The Structural Gravity Model (2016, background): “Finally, it enables to capture the effects of globalization on international trade and to correct for biases in the estimation of the impact of RTAs on trade (Bergstrand et al., 2015).”
Estimating the effects of non‐discriminatory trade policies within structural gravity models (2017, neutral): “…puzzle” in international trade, Dai et al. (2014) employ domestic sales in order to identify the impact of free trade agreements and, finally, Bergstrand et al. (2015) rely on intra-national trade flows in order to identify the impact of globalization and the evolution of international…”
On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration (2019, neutral): “the methods of Bergstrand et al. (2015), who argue that FTA estimates based on specification (4) may be biased upward because they may be capturing the effects of globalization.”
The cost of non-Europe, revisited* (2019, neutral): “This is a concern that has been considered in the literature, examples including Carrere (2006), Baier and Bergstrand (2007) or more recently Bergstrand et al. (2015) and Lim˜ao (2016).”
Heterogeneous effects of economic integration agreements (2018, result): “Bergstrand et al. (2015)), the result that the two PPML specifications had nearly identical results suggested the results were robust to including zeros.”