The Border Effect and the Nonlinear Relationship between Trade and Distance

Abstract

The border-effect literature confirms that sub-national units tend to trade more with the rest of their country than with foreign markets. However, it is likely that ongoing processes of trade integration will generate a trade-off between internal and external integration for sub-national units within countries. In this paper we estimate the internal and external border effect, using a novel dataset that captures intra- and international shipments between Spanish regions and regions in eight European countries with alternative treatments of the nonlinear relationship between distance and trade.