Trade geography matters: Land borders linked to lower GDP

A comprehensive global analysis has revealed that trade with non-bordering countries significantly increases GDP per capita, whereas trade with neighboring land-border countries may actually hinder economic growth. The findings come from a new study titled “The Impact of Trade with Border Effect on GDP per Capita: Global Evidence”, published in Economies. Using panel data from 87 countries between 2010 and 2021, the study investigates how the geography of trade, particularly land borders, affects national income, emphasizing the importance of governance and infrastructure in mediating these effects.

The research team, led by Hansen Tandra and colleagues from Indonesia’s National Research and Innovation Agency, employed a two-stage least squares (2SLS) regression method to isolate the causal effects of trade on GDP per capita. Their results offer policy-relevant insights into how geography, logistics, and institutional strength shape the economic returns of international trade relationships.

How does the nature of a border affect trade’s impact on national income?

The study makes a clear distinction between trade with land-border countries and non-land-border countries. Trade with neighboring nations, those that share a direct land boundary, was found to have a statistically significant negative effect on GDP per capita. In contrast, trade with non-border countries had a positive and significant impact on income levels across both short- and long-term measures.

One reason for this divide lies in the quality and diversity of trade relationships. Bordering countries, particularly in the developing world, often share similar economic structures and limited market sizes. This reduces the scope of comparative advantage, product diversification, and export sophistication. Additionally, land-border trade frequently suffers from high logistical costs, inefficient customs procedures, and political instability, factors that suppress its potential to stimulate income growth.

By comparison, non-border trade relationships tend to open access to distant, more diversified, and often higher-income markets. These ties encourage broader economic participation, technology transfer, and supply chain integration - all key components of economic modernization. The study also confirms that landlocked countries face compounded disadvantages, especially when their trade is primarily conducted through neighboring land routes.

What role do governance and logistics play in enhancing trade outcomes?

The researchers extended their analysis to explore the influence of institutional governance and infrastructure performance on trade outcomes. Using the World Governance Index (WGI) and the Logistics Performance Index (LPI), they found that both indicators significantly enhance the economic benefits of trade, particularly with land-bordering countries.

In nations with high-quality governance, the negative impact of land-border trade on GDP per capita was substantially mitigated. Strong regulatory institutions, transparent trade policies, and efficient border management contributed to more predictable and higher-value trade interactions. Similarly, countries with superior logistics infrastructure, such as well-maintained roads, intermodal transport systems, and digital customs platforms, were better equipped to overcome the structural disadvantages of land-based trade.

This finding highlights a critical policy leverage point: while the geographic location of a country cannot be changed, its institutional and infrastructural readiness can. The study recommends prioritizing investments in logistics systems and governance reforms to unlock the economic potential of border trade.

Can landlocked countries overcome the trade penalty?

While landlocked countries are generally disadvantaged in global trade due to their lack of seaports, the study provides a more nuanced picture. When governance and logistics are strengthened, landlocked countries can still derive economic benefits from both land-border and non-land-border trade. The inclusion of interaction terms in the model revealed that good institutions and infrastructure can neutralize or even reverse the negative impact of geographic constraints.

Importantly, landlocked countries that develop dry ports, efficient road and rail systems, and regional trade facilitation mechanisms can effectively integrate into global value chains. Furthermore, political stability and trade cooperation with neighboring transit countries were shown to significantly improve outcomes for otherwise disadvantaged nations.

The researchers stress that international donors and multilateral institutions must consider these structural challenges when designing trade capacity-building programs. Rather than viewing landlocked nations as peripheral, targeted policy and investment efforts can help transform them into viable hubs of regional commerce.

Policy implications and strategic recommendations

The study concludes that geographic trade patterns matter, but their impact on economic development depends heavily on domestic policy environments. It recommends that:

1. Countries diversify trade beyond immediate neighbors, especially by cultivating high-value partnerships with distant economies.
2. Governments invest in governance and border infrastructure, especially in land-border regions where inefficiencies can cancel out trade gains.
3. Regional coordination and logistics integration be prioritized to strengthen the trade competitiveness of landlocked and border-reliant nations.

The findings also call into question the long-standing belief that proximity inherently enhances trade’s benefits. In the context of global value chains, market access, product complexity, and connectivity now play more decisive roles than mere distance.