Spain, Split and Talk: Dissecting the Anatomy of Sub-National Trade Borders

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Jordi Paniagua
Associate Professor of Applied Economics, University of Valencia (Spain)
Kellogg Institute Visiting Fellow

Most of the world’s trade happens within national borders, and within countries, most trade occurs within regional borders. This paper dissects the anatomy of trade borders in three different layers: region-to-region, region-to-country, and country-tocountry. We construct a novel dataset that nests trade between and within Spanish regions and sectors in the International Trade and Production Database for Estimation (ITPD-E). We develop a method to identify all directional (i.e., import and export borders) borders using a Shapley-value approach, which allows us to study directorial policies like boycotts. Structural gravity estimates reveal that sub-national trade borders are sizeable in the remarkable case of Spanish regions. The paper offers several relevant policy and welfare insights to the secession movement of Catalonia from Spain, which we quantify using the general equilibrium properties of the structural gravity model. Our counterfactual experiments reveal significant welfare decline for Catalonia and Spanish regions between -3.7% and -7.8%, and -3.3% and -4.3%, respectively. A boycott on Catalan products backfires to Spanish consumers, who experience higher prices and welfare loss.