Border Effect or Country Effect ? Seattle

In an important paper, Charles Engel and John H. Rogers (1996) estimate the impact of an international border on price dispersion across US and Canadian cities. After controlling for distance and other factors, they conclude that the economic impact of the border between the United States and Canada is equivalent to shipping a good 75,000 miles (Engel and Rogers 1996, 1117, table 3). Numerous subsequent studies estimate similarly impressive border coefficients. David C. Parsley and Shang-Jin Wei (2001) find a large border effect in US-Japanese price data. Using data on quantities, John F. McCallum (1995) finds that intranational trade flows are, ceteris paribus, 22 times larger than international trade flows. In a similar vein, provincial borders in Canada (John F. Helliwell and Genevieve Verdier 2001) and state borders in the United States (Holger C. Wolf 2000) account for a significant fraction of the decreased trade flows across provinces and states, relative to trade flows within states and provinces. Furthermore, Janet Ceglowski (2003) finds that provincial borders in Canada account for a significant fraction of the discrepancy of prices across provinces. The presence of large border effects has important welfare