Borders, trade and welfare

In the era of globalization, are borders just arbitrary lines on the map?Our results show that border barriers are large and inhibit much trade.1 In this paper we show that further economic integration can very substantially increase world trade and welfare. We demonstrate this point with several applications. National borders mark differences in institutions, policies, and regulations that have economic significance. The significance of these policies becomes immediately clear when comparing countries to regions within countries that are not separated by national borders. Regions within countries are clearly more integrated. They have more synchronized business cycles, they engage in more extensive risk sharing, they trade more with each other, their growth rates converge faster, and their inflation rates are more similar.2 This paper is concerned with the barriers to the free flow of goods implied by the policies, institutions, and regulations that separate nations. Some poli-cies are specifically aimed at erecting such barriers. All other trade restricting effects of national borders ultimately can be understood to reflect “policy,” with the proviso that much institutional trade friction is not easily changed. We will discuss estimates of the size of these border barriers, as well as their impact on trade levels and on welfare. Our welfare analysis takes the extreme position of treating all border barriers as trade costs without any correspon-ding benefits. A complete analysis would, of course, take account of the ben-efits associated with some border barriers—differences in national language