Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 356: Reduced "Border Effects", FTAs and International Trade

Sebastian Franco () and Erik Frohm ()
Additional contact information
Sebastian Franco: Ecole Polytechnique (CREST), Postal: Route de Saclay 91128 , Palaiseau cedex France
Erik Frohm: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: This paper studies the role of reduced barriers to international trade from two dimensions: (i) the implementation of Free Trade Agreements and (ii) declining "border effects". Our empirical estimates suggest that diminished border effects accounts for the bulk of the increase in international trade in manufactured goods since 1970. The cost of a national border has fallen by around 10% per year for total exports, whereas it has declined by 13% for exports of final goods and 8% for intermediate inputs. The introduction of FTAs have an important role to play as well, raising international trade by 54% after 10 years according to our estimates. We also find evidence that more recent FTAs have a greater trade effect than those signed in earlier periods. Moreover, when estimating the effect of FTAs, we show that it is important to control for different border effects for final goods and intermediate inputs.

Keywords: Border effect; Free trade agreements; international trade; global value chains

JEL-codes: F13; F14; F15; F23

52 pages, June 1, 2018

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