In addition trade integration expands the market for domestic production, which tends to move progressively to the border regions as they become closer to the economic core.<sup>8</sup> That is the story of Mexico after NAFTA, which induced a flurry of domestic and foreign investments towards the regions near the US border (Hanson, 2004). Similar findings apply also to the case of Austria following the fall of the Iron Curtain in 1990. This event was particularly beneficial for the regions close to Austria's eastern border, where employment grew more than elsewhere as these regions were closer to the newly accessible markets of Eastern Europe (Brülhart et al., 2012).

This production effect may go beyond the goods’ sector and extend to services as well. Indeed the increased trade flowing through the border regions increases the demand for incidental services, such as storage, transport and logistics, which are often supplied by contractors located in these regions. Consistent with this hypothesis Hanson (1998) finds strong positive employment effects of NAFTA in the transportation and wholesale trade industries for the small US cities bordering Mexico. Interestingly for our setting, the author also finds that in large US border cities, the employment effects are strongest for the manufacturing industry. This finding confirms that integration alone is not sufficient to generate large gains via the production side. Without agglomeration economies several manufacturing industries would not be attracted to the border regions regardless of how close these regions are to the new markets. The regions in this study are dominated by agriculture. Thus, this caveat may have limited application in the short run. But it is an important one as these regions may try to move up the value chain to penetrate agro-processing and manufacturing industries which require agglomeration economies.

- **4.2. Assessing the size of the possible gains in the study region**

This brief review confirms that border regions stand to gain from deeper integration. But what is the size of this potential gain? The discussion above suggests that the answer depends on the size of the trade expansion across the border regions following trade integration as well as the increase in the share of imported goods in the regions’ expenditure.

The objective of this section is to present measures that - we argue – may predict at least in part the possible size of these two parameters and thus the gains from trade integration our study regions. These measures are based on available secondary data and are complemented by the findings from the tea case study, which provides a more granular picture of the possible gains and the nature of such gains for an important commodity produced in the region.

We compute two types of measures. The first set consists of measures of complementarity between district economies on each side of the border. These measures hinge on the simple idea that higher complementarity would provide more opportunities to trade. Constraints in data availability induce us to rely mainly on household production and consumption data to compute these measures.

The second type of measure consists of price differentials between important consumption items across the borders. Comparing price data provides a complementary way to assess potential trade expansion following the elimination of trade barriers across the borders. Equivalently these differentials proxy the thickness of trade barriers which prevent the price equalization (net of transport costs) predicted by the law of one price (LOP). This exercise is similar in spirit – although more basic - to Brenton et al. (2013), who assess the effects of the border on the deviation of the LOP in three commodities between 25 pairs of contiguous countries in Sub-Saharan Africa.

> 8 This production effect could still be subsumed in the simple formula of the welfare gains computed by Arkolakis et al. (2012) by noting that export industries have higher share of expenditures on imported goods. Therefore that raises the overall share for the regions hosting this new production.

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