Agricultural market integration in the OECD: A gravity-border effect approach

This paper uses the border effect estimate from a gravity model to assess the level of agricultural market trade integration among 22 OECD countries for the 1994-2003 period. Empirical analysis confirms that the use of a gravity equation derived from theory, in the estimation of border effect, matters. A representative estimate of the border effect shows that crossing a national border within the OECD induces an average trade-reduction effect of a factor 13. This average value masks differences that are quite substantial in market integration, with value for intra-EU trade being higher while that for trade between the Central and Eastern European Countries (CEECs) is lower. The data show a process of strong integration in all the country-trade combinations involving CEECs. However, quite surprisingly, the intra-CEEC and OECD-CEEC integration processes are almost twice as strong as those in the EU-CEEC combination. Finally, the equivalent tariffs implied by the estimated border effects are not implausible compared to the actual range of direct protection measures.