The land border crossings between the three countries therefore allow both formal and informal trade exchanges to take place.

**4. The potential gains from trade integration**

# **4.1. The gains from trade for border regions**

The gains from trade integration are one of the most studied topics in the economics literature. The classic Heckscher-Ohlin and Ricardian models predict a country’s gains from trade to be proportional to the difference in factor endowments or in production technology vis-à-vis the rest of the world. According to these models the amount of trade generated in moving from autarky to an open trade regime will be increasing in these differences. This basic insight has been confirmed by recent developments in the trade literature (Krugman, 1980; Eaton and Kortum, 2002; Melitz, 2003) that have further highlighted additional gains that are associated with: i) the “love of variety” through intra-industry trade; ii) allocative efficiency through shifting of labor and capital from less productive to more productive firms, and iii) productive efficiency through trade-induced innovation (Melitz and Trefler, 2012).

In fact Arkolakis et al. (2012) show that in these models the welfare gains from trade integration are an increasing function of the change in the share of imports in the economy and the elasticity of trade with respect to trade costs.<sup>7</sup> This powerful insight is intuitive: the higher the increase in imports relative to domestic consumption, the higher the benefits for consumers and producers that can access a wider variety of goods at lower prices relative to autarky.

While these gains from trade integration are typically considered at the national level, their implications should carry over to the within-country regional level as well. In particular, in this paper we are concerned on how the potential gains from deeper integration may apply to border regions (as opposed to the country’s average). There are at least two ways in which these regions differ from the rest of the country, which are relevant in computing the gains.

First, price changes due to deeper integration (i.e. reduction in prices of traded goods) tend to be more pronounced in border regions than in the rest of the country. That is due to the incomplete price pass-through of the international prices especially in locations remote from where the goods enter the country. Using data on Ethiopia and Nigeria, Atkin and Donaldson (2014) show that these elasticities are decreasing with the distance to the goods’ port of entry. Similarly Nicita (2009) finds that part of the reason why the effects of the North American Free Trade Agreement (NAFTA) on households’ welfare in Mexico were more pronounced in regions bordering the US was due to the decaying effects of the price changes following NAFTA. Calì (2014) also shows that the reduction in prices of traded goods following trade liberalization in Uganda in the 1990s was higher in districts hosting or close to a major border-post. This stronger price reduction in border regions following trade integration should yield larger benefits for these regions as their share of imported goods in total expenditures should increase by more than in the other regions.

> 7 The authors show that for a large class of trade models these gains are equal to: ��� = ���� ~~�~~ �/�where the first term is the �� change in real income associated with international trade integration; the term � � ~~�~~ is the change in the share of domestic expenditures and ε is the trade elasticity with respect to variable trade costs.

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