Going the distance: Estimating the effect of provincial borders on trade when geography (and everything else) matters

In the presence of often-cited provincial non-tariff trade barriers, one should observe provincial border effects in Canada. However, using provincial trade data leads to upward biased estimates of the border effect, because intraprovincial trade is skewed towards short distance flows that are poorly estimated by gravity models. We overcome this bias by using sub-provincial trade flows generated from a transaction-level transportation dataset. The results show that border effects fall as geographies are more fine-grained and uniform. In contrast to the US, where state border effects were eliminated using similar approaches, provincial border effects remain, with an implied 6.9% tariff equivalent.