The gains from economic integration

David Comerford, José V. Rodríguez Mora

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Abstract

This paper measures the effect of political integration, such as sharing a national state or economic union, on the degree of trade integration. Consistently with previous work, we find large border effects. However, such estimates may be biased and overestimate the effects of borders because of endogeneity: selection into sharing a political space is correlated with affinities for trade. We propose a method to address this and we produce estimates which are closer to the causal effect. We then conduct speculative exercises showing the costs and benefits of the changing levels of integration associated with: the independence of Scotland, Catalonia and the Basque Country from the UK and Spain (but remaining within the European Union); the UK's exit from the EU; the break-up of the EU itself; and closer integration within the EU so that its internal borders appear similar to the internal borders of individual countries (as opposed to its current state of being simply a closely integrated group of countries). We find that the border effect between countries is an order of magnitude larger than the border effect associated with the European Union.
Original languageEnglish
Pages (from-to)201-266
Number of pages66
JournalEconomic Policy
Volume34
Issue number98
Early online date30 Apr 2019
DOIs
Publication statusPublished - 25 May 2019

Keywords

  • border effect
  • trade
  • independence
  • economic integration
  • political integration

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