| Summary: | This paper analyses the border effect on the Brazilian goods market, which indicates how biased intranational trade is compared to international trade. We quantify the border effect empirically using a cross-sectional gravity equation for twenty six Brazilian states plus the Federal District and forty-six countries, and find that although Brazil has been lowering its trade barriers, the border effect is still very high by any standards. The bias in a typical Brazilian state relative to other countries was found to be around 33, suggesting that trade among Brazilian states is thirty-three times as high as trade with a foreign country. The welfare consequences of a bias of this magnitude are likely to be very large for a developing country such as Brazil. It can be explained both by the low degree of substitutability among goods produced in Brazilian states and foreign countries, as well as by the large barriers to international trade.
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