The U.S.-Canada Border Effect: Smaller Than Previously Thought and Becoming Smaller

Authors

Miwa Matsuo D.Des., The University of Iowa
Hirokazu Ishise Ph.D., Instistute for Monetary and Economic Studies Bank of Japan

Date of this Version

2012

Document Type

Article

Citation

Report # MATC-UI: 473 Final Report 25-1121-0001-473

Comments

2012 Copyright of Mid-America Transportation Center

Abstract

We revisit the effect of the U.S.-Canada national border on trade, considering to what extent the border reduces trade when observable economic factors are controlled. A reexamination of the data yields estimates of the border effect that are 50% higher than previously expected (Feenstra, 2004); however, the nonlinearity of the estimation and distance measure reduce the effect by 65%. We therefore conclude that the border effect in 1993 had a factor of 4.10. This figure is 15% lower than the effect proposed by previous research. We also calculate the border effect for subsequent years and find that this effect steadily decreased to a low of 3.21 in 2007. Interestingly, a traditional linear methodology cannot be used to identify this decline clearly.