World 3.0: Global Prosperity and How to Achieve It

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The free trade agreement did reduce the "home-bias multiple," as economists call it, by the mids, but only to twelve and with the multiple remaining stuck at thirty to forty in the case of services. It is currently estimated to be between five and ten - lower than before but still significantly greater than the level of one that would correspond to zero home bias. Corroboration of significant border effects comes from the price differences between the United States and Canada. As so many border dwellers know, there's a reason to go on international shopping trips although this type of "suitcase trade" amounts to only a small percentage of total trade, and is therefore insufficient to eliminate price differentials.

How do other borders stack up to this one?

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It's hard to tell, since very few countries maintain data on within-country trade of the sort available for Canada. However, we can get a sense of merchandise trade across regions within a country by examining regional transportation flows. More than three decades after the EU eliminated all formal trade barriers, such as tariffs and quotas, between member states, the German and French borders still matter a great deal. If borders still matter so much between neighbors, they cast an even bigger shadow on trade between countries farther away from each other.

My analysis of Spanish regions' merchandise trade with other OECD countries over found a home bias multiple ranging from fifteen with Portugal to for Japan! As we know from other studies, Spain hasn't integrated with world markets as well as Germany or even France, and these numbers bear that out. And the variation in the home bias multiple reminds us that a border effect is a "bilateral effect"-that is, it depends on which country pair one is talking about - rather than a "unilateral effect," which depends on the attributes of just one country.

For even more evidence that national borders impede trade, we can look to situations where new borders have arisen or old ones have gone away. In , when the former Czechoslovakia broke into the Czech Republic and Slovakia, the two governments took significant measures to preserve open trading relations, including a customs union, a temporary payment mechanism to deal with delinked currencies, and an agreement stipulating free movement of labor.

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Yet, trade intensity between the two new countries fell from forty times the "normal" level of trade with other countries in to ten times by Meanwhile, Germany's experience illustrates the effects of removing national borders. In the five years that followed the reunification of the former East and West Germany in , trade between the two shot up sixfold, and the share of intra-German trade in their overall trade grew fourfold.

These gains reflected large investments intended to facilitate integration, including spending on physical infrastructure like rail lines and highways, and the East's rapid development as a result. Even more interesting than the rapid increase in trade, however, are estimates that it will take decades before effects of the former East-West border disappear.

Erection of a new border can cause trade to collapse almost overnight, as in the Czechoslovak example, but removing a border has a much slower economic impact. This makes sense when you think about the relationships that accrete over time between buyers and sellers, the investment in familiar brands, the knowledge that locals have with local markets, tastes, preferences, and, of course, connective infrastructure.

Removal of a barrier doesn't put outsiders on equal footing with locals - not for decades, at least. Although Brazil opened up to more international trade during the s, Brazilian states still traded an estimated twenty-seven times more with each other than with foreign countries in China's estimated home bias in the late s was also in the twenties.

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This figure would have been higher if Chinese provinces hadn't become significantly less integrated with each other: between and , provincial border effects are estimated to have more than doubled. The effects of borders between states or regions within the same country in limiting trade seem particularly large in the BRIC countries Brazil, Russia, India, and China because of their size, poor infrastructure especially in the hinterlands , and administrative barriers to internal trade.

In general, though, the effects of internal borders are an order of magnitude smaller than those of international borders. Thus, in , Brazilian states "traded" internally more than ten times as intensely as with other Brazilian states but times as intensely as with foreign countries; for Chinese provinces in , those multiples were estimated at twenty-seven and more than times.

The point is not that internal trade flows or barriers to them are unimportant: in large countries, in particular, internal trade is often significantly larger overall than international trade and therefore even relatively small impediments to it can matter a great deal. Rather, the point is that if we want to "solve" the mystery of the missing trade, we ought to look at national borders, since that is where the really large drop-offs in trade are observed, not at state or regional borders.

In other words, World 0. He is the author of five books including the award-winning Redefining Global Strategy. For more visit: www.

World 3.0. How to Succeed Between Global and Local

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World 3.0 Global Prosperity and How to Achieve It

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World 3.0: Global Prosperity and How to Achieve It World 3.0: Global Prosperity and How to Achieve It
World 3.0: Global Prosperity and How to Achieve It World 3.0: Global Prosperity and How to Achieve It
World 3.0: Global Prosperity and How to Achieve It World 3.0: Global Prosperity and How to Achieve It
World 3.0: Global Prosperity and How to Achieve It World 3.0: Global Prosperity and How to Achieve It
World 3.0: Global Prosperity and How to Achieve It World 3.0: Global Prosperity and How to Achieve It

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