Borders are important.

Mobius strip. Photo: David Benbennick. Source: Wikipedia

I live in a border town. Hanover, New Hampshire lies directly across the Connecticut River from Vermont. Up and down the river, there’s a lot more development on the New Hampshire side of the Connecticut than on the Vermont side. This didn’t used to be the case. 150 years ago, villages on one side of the border were just as big as the other side. And Vermont – with a railroad line running along the western bank – had an advantage. What happened?

The short answer is, taxes. Vermont has individual income taxes where the top marginal rate is close to 9%, while New Hampshire has a payroll tax of about 2%. Vermont also has a sales tax of slightly more than 6%, while New Hampshire has no sales tax. Businesses located in New Hampshire can draw customers from both states and enjoy a marginal price advantage, while not having the administrative and compliance costs associated with collecting sales taxes. At the same time, their employees pay lower individual income taxes, if they also live there. All along the state line, New Hampshire benefits from tax arbitrage.

Along other borders around the world, communities benefit from regulatory differences, financial distinctions, and cultural diversity. Ports are typically where a country imports or exports goods by sea. The port authority regulates traffic in and out of the harbor, and businesses and financial institutions are established to facilitate this trade. Most of the most economically powerful cities in the world, if they aren’t political capitals, are ports and border cities.

Economic power based on per-capita output. Source: Citilab

When we evaluate new investments, one important factor to consider is whether their markets are growing. Companies that serve and work from border communities and port cities have a built-in advantage. They have larger markets and they can recruit their staff from a larger pool of talent.

In math, a shape’s borders define that space. They determine how connected and continuous an area can be. Economically, the more connected a country or company is, the more potential it has. Economists and analysts do well to focus on borders and edges. After all, the most interesting part of any wall is the door.

Douglas R. Tengdin, CFA