The gains from economic integration

This paper measures the effect of sharing a national state on the degree of trade integration.We call the causal effect of this political integration the economic integration - this ist he additional trade integration gained by entities which come together to form a country rather being independent countries. The existence of very large border effects, even within the European Union, is well known, and is a consequence of this aforementioned economic integration achieved within national states. Nevertheless, there are two potential reasons why these border effects could overestimate the gains from sharing a state. First, there could be a substitution of frictions: by integrating within a state, there could be a deterioration of links to the rest of the world. We see that this is not the case. Secondly, there could be an issue of endogenity and selection bias: places which share larger affinities are more likely to both trade with each other and to select into sharing a state. We conclude that this is an important issue and so this endogeneity means that estimates of the average border effect overstate the reductions in trade frictions achieved by sharing a state. To deal with this endogeneity problem we propose an alternative approach. We identify marginal regions(regions which could conceivably be independent countries by themselves) and marginal countries(countries that are the closest trading partner in the data to the country to which that marginal regions belong). We propose that the gap in trade frictions between these marginal regions and marginal countries is a much better estimate to the causal impact of state sharing.Even controlling for selection bias, we find that the gains from economic integration are still substantial: it is about one third of the total gains from trade.