The treatment effect of borders on trade. The great war and the disintegration of Central Europe

This paper investigates the impact of changes in national border demarcation on economic integration. It treats the national breakups in Central Europe due to WWI as a natural experiment. The set-up allows to control for selection bias when estimating the impact of national borders on trade. A gravity model of trade is used to analyze goods-specific trade among Central European regions. The main results are, first, that systematic deviations of the observations under “border treatment” are found. Regions pairs that became separated by a new national border after WWI, tended to have below average levels of economic integration already before the war. A comparison of actual and biased result for goods-specific trade yields a difference of between 21 and 86% ad-valorem tariff equivalent, and might well be higher for certain goods. Second, the analysis indicates that cross-border integration was indeed lower after WWI but that this change was economically significant only for certain sectors. Third, in the interwar period, international trade was less diverted by borders first established after the war than by borders existing already before WWI. The results stress the importance of relative barriers to trade in attenuating the adverse effects of WWI on economic integration.