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Revisiting National Border Effects in Foreign Trade in Goods of Canadian Provinces

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A significant body of empirical studies demonstrates sizable national border effects in foreign trade of Canadian provinces throughout the 1980s and 1990s. This paper revisits and expands the scope of the border effects analysis by estimating the border effect in trade with U.S. states as well as countries in the European Union (EU) and the G 20 using more recent data from 2001–10. Furthermore, we perform the Blinder-Oaxaca nonlinear decomposition (Bauer and Sinning, 2008) to decompose the border effects into various components, including the transaction costs, the tariff and non-tariff measures, and the unexplained component.

Results from the Poisson pseudo-maximum likelihood model show that, compared to existing estimates from the 1980s and 1990s, the size of the border effect in trade between Canadian provinces and U.S. states has declined. The border effects for Canada–EU and Canada–G 20 bilateral trade flows sit at somewhat elevated levels. About a third of the border effects in overall trade with EU and G-20 countries can be attributed to the variables related to transaction costs in foreign trade.

While the significance of tariffs has declined, the prevalence of non-tariff measures seems to be on a rise. That said, we find that the welfare-changing measures combined—tariff and non-tariff measures—play a limited role in explaining the border effects in comparison with the role of transaction costs and the unexplained component.

JEL Code(s): F, F1, F14, F15