Federalism, separatism and international trade

This paper explores whether countries that have a federal Constitution engage in more international trade. We identify two possible mechanisms through which political fragmentation of nation-states, namely federalism, might impact positively on trade globalization processes: domestic market fragmentation and the free trade strategy pursued by certain separatist regions in federal countries. We use a gravity equation running panel regressions to estimate the impact of federalism on trade. The Poisson estimator proposed by Santos Silva and Tenreyro (2006) is used to handle the null trade flows. We test our predictions on a large data set of 148 countries on the 19802002 period. After controlling for determinants of trade potentially correlated with federalism, a federalist system is found to increase international trade. We also find that separatism and linguistic fractionalization impact positively on trade openness. (C) 2008 Elsevier B.V. All rights reserved.