How trade barriers and national borders matter in trade flows between Canada and United

States?

AGRICULTURE, FOOD AND RESOURCE POLICYAGEC 630

Fortis Mathieu (M.Sc. Agricultural Economics)

Outline

Section 1

Literature review National Border matter : McCallum (1995) How wide is the border Engel and Rogers (1996) Gravity with Gravitas: A Solution to the Border Puzzle (2003)

Section 2

Theoretical Model : Gravity Model

Section 3

Canada’s Agricultural Trade in North America: Do National Borders Matter? (Furtan and Melle 2004)

Quantifying Non-tariff trading barriers: What difference did the U.S security precautions following 9/11 make to Canadian cross border shopping? ( Ferris 2009)

Conclusion

National border matter : McCallum (1995)

Gravity type equations

Results Estimated coefficient on the distance

variable is substantially larger than the estimated coefficients from other studies.

Canada-U.S. border continues to have a decisive effect on continental trade patterns.

ijijijjiij ueDUMMYddistcybyax

How wide is the border Engel and Rogers (1996)

Equation

Results Distance and borders are significant in

explaining price dispersion across locationsThe variation of the price is much higher for

two cities located in different countries than for two equidistant cities in the same country

kjm

n

m

imkj

ikj

iikj uDBrPV ,

1,2,1, )(

Anderson and Wincoop (2003)

Gravity with Gravitas: A Solution to the Border Puzzle

Estimates a theoretical gravity equationApply their method to resolve the famous

McCallum border puzzleResultsNational borders reduce trade between

industrialized countries by moderate amounts of 20-50 percent.

Section 2: Theoretical Model : Gravity Model

Newtonian physics

Economic transposition:

log-linear and deterministic model :

Its popularity come from two specific reasons: first its high explanatory power and the fact that data are easily available.

2D

MMgF ji

ij

jiij D

YYAX

ijijijij DYYAX lnlnlnlnln

Theoretical Model : Gravity Model

Historical point of viewTinbergen in 1962Anderson (1979)Wincoop (2003)Helpman et (2006)

Framework: profit maximization by firms in monopolistic competition,

the utility maximization by consumers, and the specialization in the supply of goods between countries.

  Furtan and Melle 2004

Large border effects for trade in some agricultural goods, such as dairy products, between Canada and the United States

Estimation

Four categories of agricultural trade were available from the interprovincial data set for 1992–98

)1(lnlnlnln 43210 ijjiij BORDERDISTGDPGDPs

)2(lnlnlnln 543210 ijjiij eEIDISTGDPGDPs

Results Border effect of 91.4 is large and suggests that agricultural

trade between the two countries is more restricted than expected given the trade agreements.

Border effect for grains increased after 1996.

The border effect for “meat, fish, and dairy” has not declined since 1992, which is the result of the high tariffs for these products in both countries.

One of the results of this study is that the border effects for agricultural trade between the United States and Canada and between Mexico and Canada have declined over the period 1992–98

Ferris 2009

Impact of the non tariff trade barriers on the Canadian cross border shopping.

Ferris estimated first the implied cointegration model with data between January 1972 to December 1997 and then for the longer period – January 1972 to August 2001- leading into 9/11

The number of same day cross border shoppers has fallen by as many as 800,000 individuals per month in the post 9/11 period for reasons unrelated to cross country price differences and usual travel cost considerations.

Conclusion

National borders still continue to have a significant impact on trade flows.

Further research might incorporate the implication of the electronic trade to analyze trade flows between two countries?

Thank you