Distance deterrence, trade barriers and accessibility. An analysis of market potential in the European Union

Abstract

The interest in disentangling the role of borders in international trade is growing even within virtually borderless areas like the European Union. While there are a variety of research studies measuring how borders affect trade, there is little insight into the impact of borders on the potential accessibility to markets. The aim of this paper is twofold. First we provide a coherent calibration of the impedance parameters affecting trade (border effect based on best official data available and with a sound estimation of distance and the distance decay parameter with the use of network-based measurements). The second objective is to ascertain to what extent the market potential of different countries is hampered by the border effect. The analysis reveals that calibrating distance decay and considering border effects provides more realistic results. These results evidence that peripheral areas are more sensitive to the estimation of the distance decay parameter, whilst the main metropolitan regions are less affected by both distance decay and border effects. Finally, we present the decomposed market potential in a spillover-like matrix showing those countries that have a diversified set of contributors to their market potential and those where the number of contributors is limited.