24 potential. By the same token, it is far from certain<sup>that a networkof FTAs would providea boost</sup> to trade of SEE-5 with other Balkan countries.

For all these reasons, one may conclude that<sup>while thepotentialfortrade expansion</sup> varies across the region, it overall does not seem<sup>to be highinshort-term.Inthecaseof former</sup> Yugoslav economic space, except for a glaring<sup>case of under-trade betweenCroatiaandSerbia,</sup> trade anong other former republics seems to be at the<sup>levelsdetermined by economic factorsand</sup> geography. Ratios of actual trade to potential<sup>tradefor FYR Macedoniatrade withBosniaand</sup> Herzegovina and Croatia appear to indicate room<sup>forsignificant expansion.But consideringthat</sup> FYR Macedonia is landlocked and separated<sup>fromthesetwocountriesbyseveral border</sup> formalities and poor transportation, the distance<sup>inagravityequationalonedoesnot capturereal</sup> barriers to trade faced by FYR Macedonia with<sup>itsmore distant neighbors.Thecostof tradingis</sup> significantly larger than the distance alone might<sup>imply.Evenitslong-standingFTAhas not</sup> helped boost its trade with Bulgaria. As for<sup>other regional partners,their ratios of the actual trade</sup> to potential trade indicate some potential<sup>for expansion.</sup> But it appears to be limited either because of geography (Albania) or because-as<sup>weshowbelow-of thenatureof thecurrent</sup> trade consisting mainly in exchanges of products of<sup>differentsectorsrather thaninatwo-way</sup> trade of similar products.

# **Potential for Regional Trade in Historical**<sup>**andComparativePerspective**</sup>

Trade within state borders tends to be more intensive<sup>thantradeacross bordersforanumberof</sup> reasons stemming from the absence of international<sup>borders.Firms operatewithinthesame legal</sup> framework; they do not encounter foreign exchange<sup>risk;their productsaresubject tothesame</sup> standards; they do not face red tape usually associated<sup>withtradingacrossinternationalborders;</sup> they do not fear of contingent protection; etc. In consequence, borders matter even in trade among highly developed countries locked in a preferential<sup>tradeagreement.Forinstance,trade</sup> among firms in Canadian provinces bordering<sup>theUnitedStatesisalmost20timeslargerthan</sup> trade with US firms, even though both countries<sup>areNAFTA members and sharethesame</sup> language and similar institutions (McCallum 1995).

Another, admittedly extreme, indication of the<sup>importanceofnationalbordersistrade</sup> among republics in the Soviet Union before<sup>itsdissolutionin1991.</sup> Shares of inter-republic exports in republics' total exports in 1989 varied<sup>betweenthelowestof 68percent (Russia)and</sup> the highest of 98 percent (Kyrgyz Republic).<sup>Sharesof thistradepredictedby thegravitymodel</sup> for the former Soviet republics were almost<sup>three timeslowerrangingbetween16percent</sup> (Russia) and 37 percent (Kyrgyz Republic).<sup>32</sup> Their high levels reflected not only the<sup>anti-</sup> external trade bias of the Soviet Union under<sup>centralplanningbut alsothe fact thattrade between</sup> the former republics was internal trade.

While Yugoslav inter-republic trade shared both of<sup>these features,anti-exportbiasof</sup> Yugoslav import-substitution strategy was markedly<sup>weakerandthesizeof itseconomywas</sup> smaller. Thus one would expect much lower levels of<sup>dependenceonintra-republictrade.</sup> Indeed it appears that by the demanding "Soviet"<sup>standardsinternaltradeamongYugoslav</sup> republics was even lower than one might expect.<sup>As canbe seen fromdatain Table6,theshares</sup> of inter-republic exports in total exports ranged<sup>between 43(Serbia)and 57percent(Croatia).</sup> 32 See Table 2 in Kaminski, Wang and Winters (1996, p. 13).