Salvador Gil-Pareja, Ph.D1, Rafael Llorca-Vivero, Ph.D.1, and Jose A. Martinez-Serrano, Ph.D2. (1) Departamento de Estructura Economica, Universidad de Valencia, Universidad de Valencia, Av. de los Naranjos s/n, Valencia, 46022, Spain, (2) Departmento de Estructura Economica, Universidad de Valencia, Universidad de Valencia, Av. de los Naranjos s/n, Valencia, 46022, Spain
Since the path-breaking paper by McCallum (1995), there has been a notable academic interest in the research of the so-called border effect, that is, the negative impact of national borders on trade flows. After controlling for market size and distance, McCallum found that trade among Canadian provinces exceeded province’s trade with US states by more than a factor of 20. Subsequent studies have investigated the border effect across space and time, documenting that international borders strongly diminish trade. Despite technological progress in transports and communications and negotiated reductions in trade barriers, market segmentation continues to exist and political boundaries shape the geographical pattern of trade.
During the last two decades there has been a dramatic rise in the number of regional trade agreements (RTAs) all over the world. In addition, in that period, there has been a renewed push to broaden and deepen RTAs throughout the five continents. An important feature of this wave of regionalization is that many RTAs have taken place along continental lines. Thus, trade policy may contribute to the existence of a border effect at the continental level.
There is no empirical evidence about the possible existence of a “continental bias” in trade. Countries on the same continent trade more with each other than countries located in different continents? If it is the case, are there differences in the size of the continental bias across continents? This paper examines these questions empirically using the gravity equation on a sample that includes 181 countries over the period 1990-2006.
The results of this paper reveal that except for Africa, there is a "continental bias" in trade. Even with the dense web of regional integration agreements that are currently operating in this continent, Africa’s trade with the rest of the world is much larger than intra-African trade. This evidence suggests that African countries are not natural trading partners.