Discussion Paper

No. 2014-27 | July 03, 2014
Islands in Trade: Disentangling Distance from Border Effects
(Published in Special Issue Distance and Border Effects in Economics)

Abstract

There is a well-established literature on border effects covering trade between regions separated by a land border; however that literature has not so far considered the case of regions separated by a sea border. Whilst the former is typically studied as a political border that affects adjacent regions belonging to different countries and can be reduced by free trade agreements, the latter is a geographical border that affects regions within the same country and cannot be reduced in a similar way. Both types of borders produce similar effects upon trade, calling for a modification of the trade cost function to reflect the fixed cost caused by the need to pay fees and taxes, as well as the time-loss inefficiency, related to the existence of the border. However, in the case of the sea border that fixed cost is due to the use of two modes of transport (road and sea typically). The empirical strategy used to estimate the “island effect” proceeds in two steps. First an augmented gravity model is estimated for mainland and island regions; then a Blinder–Oaxaca decomposition is applied to the gravity estimation results in order to disentangle the distance and border effects for those regions, net of all other factors controlled for in the gravity estimations. Results show that island regions are at a substantial disadvantage compared to continental regions, which is due more to the lack of adjacency imposed by the sea border rather than to the higher average distance.

Data Set

Data sets for articles published in "Economics" are available at Dataverse. Please have a look at our repository.

The data set for this article can be found at: http://dx.doi.org/10.7910/DVN/26654

JEL Classification

F15 C23

Cite As

José Luis Groizard, Helena Marques, and Maria Santana (2014). Islands in Trade: Disentangling Distance from Border Effects. Economics Discussion Papers, No 2014-27, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2014-27

Assessment



Comments and Questions


Anonymous - Reader Comment
July 10, 2014 - 08:26

see attached file


Anonymous - Thank you from the authors and data clarification
July 18, 2014 - 10:52

We thank for these anonymous comments which we are willing to take into account in revising the paper. Regarding data, we would like to clarify that it is not possible to disaggregate the regional trade flows by mode of transport and by origin/destination. Moreover, the trade flows used correspond to ...[more]

... the sum of four manufacturing aggregates (agricultural products, intermediate goods, equipment goods and consumption goods).


Anonymous - Comment
July 21, 2014 - 14:58

On “Islands in Trade: Disentangling Distance from Border Effects” by Jose Luis Groizard, Helena Marques, and Maria Santana.

Short summary:
The authors investigate if island regions have different trade costs from mainland regions using Spanish data on inter-regional trade between different regions in Spain. They apply a standard gravity ...[more]

... equation, in which they control for island regions in the trade cost function. Then they decompose their results using Blinder-Oaxaca decomposition to disentangle the effects between island regions and mainland regions.
The authors find that islands are disadvantaged due to higher (island-specific) fixed trade costs. Reducing these trade costs, would lead to a significant increase in inter-regional trade.
The research question is very interesting and relevant to correctly specify trade cost functions and hence gravity equations. Especially the Blinder-Oaxaca decomposition seems to be a highly suitable approach as it allows a more detailed analysis of the importance of island border effects in the trade cost function.

Comments:
1. The identification of the island border effect depends on the correct specification of the transport cost function:
a) It is not clear why the Island border effect leads to higher fixed trade costs while the variable costs are the same for air, land or sea transport. The authors might be able to give more specific (anecdotal) evidence for the higher fixed transportation costs. It would be interesting to interact the island dummy with the distance measure in the transportation costs equation (8) to allow for different variable costs. Actually the Blinder-Oaxaca decomposition would suggest this as the “Coefficients term C” for distance is very high. This should considerably improve the results of the gravity estimation.
b) Omitted variables, such as the (time varying) industry structure of the regions might bias (or even drive) the results. For robustness variables such as size of the service and agricultural sector could be included. As well as historical ties of regions, e.g. Balearic Islands and Cataluña.
2. The motivation to use distance and quadratic distance should be described in more detail, especially as the effects in the gravity estimation are not clear. The authors find that distance has a U-shape effect on trade for islands and an inverse U-shape effect for the mainland. At which distance is the turning point for these effects? If I use log(km) with the coefficients of the gravity equation in Table B1, I find that exports and imports for Island regions are strictly decreasing for reasonable values of distance (<4,000km), while imports and exports for mainland regions increase for reasonable values of distance (<4,000km).
3. The Alchian-Allen effect might be an explanation for the lower trade of islands due to higher fixed transportation costs. The corresponding literature should be mentioned.
4. It would be interesting to link the inter-regional findings for Spain to international trade. Do we find a similar effect for islands, such as Cyprus, Ireland, or Sri Lanka.