Tear Down this Wall: On the Persistence of Borders in Trade

54 Pages Posted: 18 Nov 2009

See all articles by Volker Nitsch

Volker Nitsch

Darmstadt University of Technology - Department of Law and Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Nikolaus Wolf

Humboldt University Berlin - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); London School of Economics - Centre for Economic Performance (CEP)

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Date Written: November 2009

Abstract

Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade both in the cross-section and over time. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. The evolution of intra-German trade flows after reunification then provides new insights for both the globalization and border effects literatures. Our estimation results show a remarkable persistence in intra-German trade patterns along the former East-West border; political integration is not rapidly followed by economic integration. Instead, we estimate that it takes at least one generation (between 33 and 40 years or more) to remove the impact of political borders on trade. This finding strongly suggests that border effects are neither statistical artefacts nor mainly driven by administrative or “red tape” barriers to trade, but arise from economic fundamentals.

Keywords: integration, home bias, globalization

JEL Classification: F14, F15

Suggested Citation

Nitsch, Volker and Wolf, Nikolaus, Tear Down this Wall: On the Persistence of Borders in Trade (November 2009). CESifo Working Paper Series No. 2847, Available at SSRN: https://ssrn.com/abstract=1507640

Volker Nitsch (Contact Author)

Darmstadt University of Technology - Department of Law and Economics ( email )

Marktplatz 15
Residenzschloss
Darmstadt, 64283
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Nikolaus Wolf

Humboldt University Berlin - Department of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

HOME PAGE: http://www.wiwi.hu-berlin.de/professuren/vwl/wg/

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics - Centre for Economic Performance (CEP) ( email )

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