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September 25, 2017STUDY: EFFECT OF INTERPROVINCIAL BORDERS ON TRADE One of the concerns of Canadian policymakers are border-related trade costs and other factors that dampen trade.
It should be expected that the cost of trading goods will increase as the distances between trading regions increase. The capacity of trading regions to generate and absorb trade are additional competitive factors to consider. In the absence of border effects, regional trade within provinces and across provincial borders should be equal when these other factors are taken into account.
A recent Statistics Canada study concluded that, in Canada, provincial borders may actually impede trade. The study sets out to correct various over estimations of border effects. After correcting for geographical and other bias', the study found that trade within provincial borders is 53% stronger than across provincial borders, to a level similar to the imposition of a 6.9% tariff. The study also found, that within the United States, there is no evidence of a corresponding "border effect" for trade between the various states.
When Geography Matters
Comparing intraprovincial and interprovincial trade levels is challenging, because intraprovincial trade is heavily skewed toward short-distance flows. When these are not properly taken into account by gravity-based trade models, intraprovincial trade levels and interprovincial border effects tend to be overestimated.
To resolve this bias:
- Transaction level transportation files are a source of accurate point-to-point distance measures for flow of goods. New sub-provincial trade flows developed from a set of transaction-level transportation files can be used to estimate provincial border effects.
- The sensitivity of the results to distance is captured by estimating models across standard geographies of varying size (provinces, economic regions, census divisions) and non-standard geographies (hexagonal lattices) of differing size and placement via a series of simulations.
- How distance is measured matters. Estimation models are sensitive to distance. On average, network distance is 33% greater than great-circle distances.
- Estimates of provincial border effects based on comparisons of intraprovincial with interprovincial trade flows may still be biased, if these units do not effectively capture the pattern of trade.
Source:
Statistics Canada Daily, September 14, 2017
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