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112/04/21 1
Economic Similarity and Bilateral Trade
ByI-Hui Cheng (鄭義暉 )
Department of Applied Economics, National University of Kaohsiung, Taiwan
112/04/21 2
This research uses the bilateral trade information from 1986 to 2008 and the common types of trade gravity models, such as the traditional cross-sectional model, three-way fixed effects model, and bilateral fixed effects model, to re-examine bilateral trade flow determinants.
This article assumes that the trading economies’ similarity and the bilateral trade volumes’ similarity in percentage over foreign trade with each other, contribute to the parties’ willingness to be involved in the same regional trade group.
Economic similarity does matter in the formation of REI. Using endogenous REI dummies leads to different
results.
Summary
112/04/21 3
Regional economic integration As of May, 2012, there have been 489 regional trade
agreements proposed to WTO; 357 of which have been notified according to the 24th clause in General Agreement on Tariffs and Trade (GATT); 92 of them was proposed according to the 5th clause in the General Agreement for Trade of Service (GATS) and 31 of them were proposed according to the enabling clause
Trade within the region occupies a high proportion of the total trade value.
The current trend in world economy
112/04/21 4
Value of intra-trade (in millions of dollars)
Trade Groups 1980 1995 2000 2005 2008 2010 2011
CEMAC 75 120 96 201 355 881 772
COMESA 569 1,373 1,518 3,024 5,999 9,538 7,776
ECOWAS 661 1,875 2,715 5,497 9,073 8,874 11,928
SADC 110 4,427 5,916 10,730 18,981 19,393 20,121
CACM 1,174 1,594 2,586 4,342 6,606 5,549 6,105
CARICOM 613 878 1,076 2,087 4,283 2,481 2,973
LAIA 11,192 35,986 44,253 71,720 138,532 130,289 161,267
MERCOSUR 3424 14,199 17,829 21,128 43,553 43,782 53,663
NAFTA 102,218 394,472 676,142 824,658 1,013,258 955,315 1,101,189
ASEAN 12,413 79,544 98,060 165,458 255,467 263,024 311,033
SAARC 768 2,172 2,981 8,775 15,077 16,603 20,123
EFTA 524 925 831 1,252 2,910 2,088 2,945
EU 499,570 1,419,198 1,641,252 2,732,159 3,972,306 3,329,971 3,869,925
Euro zone 309,150 9,029,52 976,929 1,629,914 2,301,183 1,945,733 2,243,062
APEC 357,698 1,688,706 2,262,711 3,310,753 4,694,781 4,874,714 5,680,394
The current trend in world economy
112/04/21 5
Value of intra-trade as percentage of each group
Trade Groups 1980 1990 1995 2000 2005 2008 2010 2011CEMAC 66.5 40.3 30.3 28.7 33.9 34.1 49.8 44.9
COMESA 79.2 42.0 41.0 41.2 45.7 53.6 61.1 52.0ECOWAS 73.5 77.1 74.4 74.6 66.9 68.1 54.7 60.4
SADC 52.6 85.8 84.5 80.7 80.6 79.5 75.9 78.8CACM 37.2 33.0 31.2 24.5 25.2 26.8 24.7 23.2
CARICOM 7.8 21.0 22.2 15.2 21.0 22.0 18.8 19.2LAIA 25.4 25.8 17.1 19.3 23.0 25.7 25.7 26.0
MERCOSUR 31.8 43.1 38.7 26.7 32.5 35.8 40.0 39.8NAFTA 79.0 87.4 91.0 90.5 88.0 86.1 85.2 84.4ASEAN 29.0 42.0 39.1 39.5 39.0 38.8 36.8 36.3SAARC 14.9 13.3 13.9 15.6 14.2 13.1 12.2 11.8EFTA 1.4 1.1 0.8 0.7 1.0 1.1 0.9 1.1
EU 86.0 91.2 92.4 91.0 90.3 89.4 89.6 88.9Euro zone 70.6 71.8 69.9 68.9 67.3 66.8 67.6 66.8
APEC .. .. .. .. .. ..
The current trend in world economy
112/04/21 6
The Dummy Variable Approach Integration schemes in western Europe [Aitken, 1973;
Mayes, 1978; Nelsson, 2000] Imperfect competition [Bergstrand, 1985,1989] Currency volatility [Thursby & Thursby, 1987; Frankel
and Wei, 1998]. Different regional blocs [Bayoumi & Eichengreen,
1997; Frankel et al., 1995,1998; Egger, 2004] 2-stage REI dummies [Baier & Bergstrand, 2007]
The literature
112/04/21 7
The Heterogeneity Does Matter Helpman (1987): Imperfect competition Hummels & Levinsohn (1995): Monopolistic
competition + IIT. Mátyás, L. (1997) : The heterogeneity of trader Cheng & Wall (1999,2005) & Feenstra (2002): The
heterogeneity of bilateral trade relationships Baltagi et al (2003): The heterogeneity of bilateral
trade relationships, and traders. Egger: 2SLS approach: use REI twice.
The literature
112/04/21 8
The gravity-type equation of bilateral trade Pöyhönen (1963), Linnemann (1966).
Typical type:
Frictionless type:
The bilateral trade model
3
21
)(
)()(0
ij
Pj
Pi
ij R
MEX
3
21
0
ij
jiij
D
YYX
w
jiij Y
YYX
112/04/21 9
Discussion on Relative distance as the proxies of transport costs Relative distance between two places
The cost of overcoming the friction of absolute distance,
Social, cultural and economic connectivity. Conventional explanatory variables include:
Distance, language, common border, economic agreement, political alliance, religion, etc.
How to find better ones?
112/04/21 10
Available Models Cross-sectional Model
Single CS Pooled CS [in this paper]
Difference Model Fixed-effect Model
Two-way FE [in this paper] Three-way FE [in this paper]
On the statistical specification
112/04/21 11
The basic model (Mátyás (1997), Model FEM)
Cheng & Wall (1999,2005), Feenstra (2002) (Model FCW) :
Carr, Markusen & Markus (2001), Anderson & van Wincoop (2003), Baltagi, Egger & Pfaffermayr (2003) (Model BEP) :
ijtijtijtijijij
jtitjtitjitijt
SIMREAADJLANGDIST
NNYYX
88765
4321
ln
lnlnlnlnln
ijtijtijt
jtitjtitijtijt
SIMREA
NNYYX
88
4321 lnlnlnlnln
The empirical gravity-type models
ijtijtijt
jtitjtitjiijtijt
SIMREA
NNYYX
88
4321 lnlnlnlnln
112/04/21 12
Deardorff (1998):
• λk: good k’s share of the world market • αik: exporter i’s production share• βjk: importer j’s consumption share• “~”: the difference between the average.
jkikkw
jiij Y
YYT ~~1
Arbitrary preferences
112/04/21 13
Deardorff (1998):
where• tij: transport cost of the Samuelson iceberg form• θh: country’ share of the world income• ρij: the TC weighted with the average distance δ,
hihh
ij
ijw
jifobij tY
YYT
1
11
Impeded trade
Sj
ijij
t
112/04/21 14
• Economic size:
• Per capita GDP • Bilateral export • Bilateral import
22
1
jtit
jt
jtit
itijt YY
Y
YY
YSIM
Economic similarity
112/04/21 15
Linder hypothesis Intra-industry trade Dispersion or similarity Openness
Related empirical topics
112/04/21 16
The exporting value of 41 exporting countries and 57 importing countries, from 1986 to 2008, 52,486 obs.; 2282 pairs.
Data resources: IMF DOTS, 1986-2008 ; The WDI Indicators 2010.
REI dummies: The European Union (EU), The Euro Zone (EURO), North American FTA (NAFTA), the South American Common Market (MERCUSOR), and the ASEAN Free Trade Area (AFTA).
The data
112/04/21 17
Table 1 sim_gdp sim_pop sim_ypc sim_x_xi sim_m_mi
sim_gdp 1.0000
sim_pop 0.3091 1.0000
sim_ypc 0.2464 0.1107 1.0000
sim_x_xi 0.4414 0.0599 0.1621 1.0000
sim_m_mi 0.5198 0.0828 0.1797 0.2925 1.0000
Correlation matrix of economic similarity variables
112/04/21 18
Basic model + REI dummies + similarity Modified model + REI dummies +
similarity Bilateral trade in East Asia (exercise)
The empirical results
112/04/21 19
The estimation results
Table 2Pooled model - CS Pooled model - CS Pooled model - CS
I II I II I II
constant-1.939*(0.674)
2.871*(0.297)
-6.011*(0.675)
0.240 (0.396)
2.374*(0.666)
5.567*(0.302)
lngdpi1.459*(0.008)
1.417*(0.007)
1.282*(0.006)
1.252*(0.006)
1 1
lngdpj1.085*(0.007)
0.990*(0.007)
1.004*(0.006)
0.923*(0.005)
1 1
lnpopi-0.298*(0.008)
-0.272*(0.007)
-0.018*(0.006)
-0.017*(0.006)
lnpopj-0.128*(0.008)
-0.096*(0.007)
-0.064*(0.006)
-0.114*(0.006)
lndistij-0.959*(0.014)
-0.862*(0.014)
-1.025*(0.015)
-0.913*(0.014)
-1.028*(0.015)
-0.897*(0.015)
language0.899*(0.026)
0.903*(0.026)
0.860*(0.027)
0.869*(0.026)
0.751*(0.027)
0.808*(0.026)
adjacency0.358*(0.063)
0.290*(0.062)
0.215*(0.064)
0.165*(0.062)
0.353*(0.065)
0.283*(0.064)
112/04/21 20
Table 2Pooled model - CS Pooled model - CS Pooled model - CS
I II I II I II
EU-0.583*(0.056)
-0.507*(0.055)
-0.278*(0.056)
-0.241*(0.055)
-0.082 (0.057)
-0.165*(0.055)
EURO-0.153^(0.089)
-0.163^(0.087)
-0.138 (0.091)
-0.150^(0.088)
-0.178*(0.092)
-0.180*(0.090)
NAFTA-0.410*(0.213)
-0.145 (0.208)
-0.358^(0.217)
-0.087 (0.211)
0.305 (0.220)
0.359^(0.214)
SEAFTA2.796*(0.180)
2.393*(0.176)
2.463*(0.183)
2.075*(0.178)
2.401*(0.187)
2.026*(0.181)
MERCOSUR2.147*(0.163)
2.230*(0.159)
2.066*(0.166)
2.164*(0.162)
1.633*(0.169)
1.886*(0.164)
SIM_GDP0.892*(0.131)
1.080*(0.134)
0.493*(0.132)
SIM_YPC1.261*(0.479)
-1.727*(0.467)
0.247 (0.483)
-2.820*(0.470)
-1.311*(0.494)
-5.292*(0.476)
SIM_EXPORT 2.058*(0.057)
2.123*(0.058)
1.987*(0.058)
SIM_IMPORT 1.256*(0.056)
1.448*(0.057)
1.643*(0.056)
112/04/21 21
Table 3FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t)
I II I II I II I II
constant32.34*(4.440)
-33.68*(1.701)
45.42* (4.165)
-23.15* (1.540)
-19.55*(3.083)
-41.48*(2.946)
4.267 (2.708)
-27.05*(2.642)
lngdpi1.520*(0.053)
1.8200.050)
1 11.743*(0.074)
1.889*(0.073)
1.678*(0.065)
1.819*(0.065)
lngdpj1.467*(0.052)
1.323*(0.051)
1 11.453*(0.075)
1.389*(0.076)
1.459*(0.066)
1.353*(0.068)
Lnpopi0.411*(0.061)
0.343*(0.057)
0.502*(0.061)
0.485*(0.058)
0.285*(0.087)
0.212*(0.085)
0.242*(0.076)
0.197*(0.076)
Lnpopj0.032
(0.087)0.243*(0.084)
0.029 (0.087)
0.214*(0.084)
0.432*(0.108)
0.648*(0.106)
0.559*(0.094)
0.739*(0.094)
Lndistij-1.411*(0.014)
-1.307*(0.014)
Language0.848*(0.026)
0.749*(0.026)
Adjacency-0.341*(0.054)
-0.241*(0.054)
112/04/21 22
Table 3
FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t)
I II I II I II I II
eu_2-0.196*(0.078)
-0.048 (0.075)
-0.290*(0.079)
-0.160*(0.075)
1.093*(0.055)
0.996*(0.054)
-0.593*(0.051)
-0.540*(0.051)
euro_2-0.138*(0.069)
-0.230*(0.066)
-0.152*(0.069)
-0.249*(0.066)
-0.022 (0.087)
-0.018 (0.085)
-0.023 (0.076)
-0.016 (0.076)
nafta_20.309
(0.264)0.238
(0.254)0.238
(0.265)0.154
(0.254)2.501*(0.203)
1.807*(0.199)
1.101*(0.181)
0.512*(0.181)
seafta_20.046
(0.139)0.028
(0.133)0.208
(0.139)0.209
(0.133)2.764*(0.173)
2.537*(0.170)
0.106*(0.153)
0.200 (0.154)
sacu_20.268
(0.171)0.486*(0.164)
0.156 (0.171)
0.343*(0.165)
5.043*(0.153)
4.785*(0.151)
2.132*(0.139)
2.198*(0.140)
112/04/21 23
Table 3FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t)
I II I II I II I II
sim_gdp-12.83*(0.802)
-13.76*(0.770)
-4.305*(0.179)
-6.053*(0.157)
sim_ypc13.81*(1.419)
6.863*(1.367)
15.86*(1.413)
8.924*(1.367)
3.714*(0.517)
-4.294*(0.506)
-4.144*(0.457)
-10.19*(0.457)
sim_export2.859*(0.059)
2.854*(0.059)
2.181*(0.060)
1.160*(0.055)
sim_import2.438*(0.067)
2.374*(0.067)
1.576*(0.060)
0.608*(0.054)
Observations 50891 50437 50891 50437 50891 50437 50891 50437
Parameters 2316 2317 2314 2375 130 131 133 134
log-likelihood -86230.4 -83384.9 -86321.9 -83543.9 -106431.8 -104584.2 -99649.85 -98989.7
Adj R-squared 0.8622 0.8723 0.6784 0.7013 0.7083 0.7170 0.7765 0.7733
Akaike Info. Crt. 177092.8 167278.0 177271.8 167584.0 213123.5 209430.3 199565.7 198247.4
Bay. Info. Crt. 197560.3 169520.4 197721.7 169773.4 214272.4 210586.9 200741.1 199430.4
112/04/21 24
The estimation results (using IV)
Table 4Pooled model - CS FE2 (ij, t) FEM (i, j, t)
I II I II I II
lngdpi 1.461*(0.008)
11.740*(0.051)
1 1.820*(0.074)
1
lngdpj 1.106*(0.007)
11.320*(0.053)
1 1.383*(0.078)
1
lnpopi-0.329*(0.008)
-0.047*(0.007)
0.316*(0.060)
0.430*(0.059)
0.265*(0.087)
0.396*(0.086)
lnpopj-0.162*(0.009)
-0.086*(0.007)
0.503*(0.073)
0.544*(0.073)
0.546*(0.106)
0.605*(0.106)
eu_2 1.003*(0.054)
1.614*(0.054)
-0.099 (0.078)
-0.194*(0.078)
1.096*(0.054)
1.076*(0.054)
euro_2-0.162^(0.096)
-0.196*(0.099)
-0.129^(0.068)
-0.140*(0.068)
-0.014 (0.087)
-0.026 (0.087)
nafta_2 1.153*(0.224)
1.908*(0.231)
0.347 (0.263)
0.268 (0.263)
2.150*(0.203)
2.127*(0.203)
seafta_2 4.460*(0.192)
4.097*(0.198)
-0.002 (0.138)
0.161 (0.138)
2.788*(0.174)
2.924*(0.173)
sacu_2 4.274*(0.167)
3.780*(0.172)
0.277^(0.170)
0.151 (0.170)
5.077*(0.154)
5.026*(0.154)
112/04/21 25
The estimation results (using IV)
Table 4Pooled model - CS FE2 (ij, t) FEM (i, j, t)
I II I II I II
lngdpi 1.461*(0.008)
11.740*(0.051)
1 1.820*(0.074)
1
lngdpj 1.106*(0.007)
11.320*(0.053)
1 1.383*(0.078)
1
lnpopi-0.329*(0.008)
-0.047*(0.007)
0.316*(0.060)
0.430*(0.059)
0.265*(0.087)
0.396*(0.086)
lnpopj-0.162*(0.009)
-0.086*(0.007)
0.503*(0.073)
0.544*(0.073)
0.546*(0.106)
0.605*(0.106)
eu_2 1.003*(0.054)
1.614*(0.054)
-0.099 (0.078)
-0.194*(0.078)
1.096*(0.054)
1.076*(0.054)
euro_2-0.162^(0.096)
-0.196*(0.099)
-0.129^(0.068)
-0.140*(0.068)
-0.014 (0.087)
-0.026 (0.087)
nafta_2 1.153*(0.224)
1.908*(0.231)
0.347 (0.263)
0.268 (0.263)
2.150*(0.203)
2.127*(0.203)
seafta_2 4.460*(0.192)
4.097*(0.198)
-0.002 (0.138)
0.161 (0.138)
2.788*(0.174)
2.924*(0.173)
sacu_2 4.274*(0.167)
3.780*(0.172)
0.277^(0.170)
0.151 (0.170)
5.077*(0.154)
5.026*(0.154)
112/04/21 26
The empirical exercise for research students
112/04/21 27
The empirical exercise(Model FCW (ij, t), I.)
exporterimporter
CHN HKG IDO JPY KOR MYS PHL SGP THL
CHN 2.57 0.21 2.28 2.78 1.40 1.68 3.00 1.14
HKG 1.50 1.30 1.90 2.27 1.59 3.28 3.01 1.05
IDO 0.91 3.07 1.46 1.51 2.24 3.02 3.65 0.55
JPY 1.22 1.90 -0.32 3.26 0.66 1.20 1.09 -0.18
KOR 1.71 2.27 -0.27 3.26 0.79 1.33 1.24 0.07
MYS 1.40 2.66 1.54 1.73 1.86 2.48 3.69 0.89
PHL 1.68 4.34 2.31 2.27 2.40 2.48 3.56 1.08
SGP 1.93 3.07 1.88 1.09 1.24 2.62 2.50 1.14
THL 1.84 2.83 0.55 1.59 1.84 1.60 1.79 2.91
112/04/21 28
The empirical exercise (Model FCW (ij, t), II.)
exporterimporter
CHN HKG IDO JPY KOR MYS PHL SGP THL
CHN -0.46 -2.45 0.64 2.20 -0.21 0.67 5.96 0.46
HKG -1.19 4.73 0.15 1.30 1.09 9.43 6.67 0.91
IDO -2.23 5.59 -2.54 -2.38 -0.16 7.34 7.41 -1.97
JPY -0.09 0.15 -3.40 4.40 -1.83 -0.15 -2.41 -2.97
KOR 1.48 1.30 -3.24 4.40 -1.43 0.27 -1.94 -2.18
MYS -0.21 1.82 -0.29 -1.10 -0.70 3.17 5.06 -2.31
PHL 0.67 10.2 7.22 0.58 1.00 3.17 7.72 0.28
SGP 5.23 6.67 6.55 -2.41 -1.94 4.33 6.99 1.17
THL 0.59 1.76 -1.97 -2.11 -1.33 -2.18 0.41 2.02
112/04/21 29
The empirical exercise Model FCW (ij, t), I: using instrument variables.
exporterimporter
CHN HKG IDO JPY KOR MYS PHL SGP THL
CHN 0.33 -1.52 0.25 0.67 -0.18 0.06 1.37 -0.72
HKG 0.13 0.04 0.04 0.36 0.11 2.06 1.50 -0.67
IDO -1.58 0.45 -1.44 -1.40 -0.60 0.74 0.94 -2.21
JPY -0.21 0.04 -1.85 1.20 -0.69 -0.23 -0.66 -1.73
KOR 0.21 0.36 -1.80 1.20 -0.58 -0.11 -0.53 -1.52
MYS -0.18 0.57 -0.55 -0.23 -0.12 0.75 1.45 -1.10
PHL 0.06 2.52 0.79 0.23 0.35 0.75 1.85 -0.77
SGP 0.91 1.50 0.54 -0.66 -0.53 1.00 1.39 -0.60
THL -0.78 -0.27 -2.21 -1.33 -1.11 -1.15 -0.83 -0.20
112/04/21 30
Economic similarity does matter in the formation of REI.
Using endogenous REI dummies leads to different results.
The conclusion
112/04/21 31
Anderson, J. E., (1979) “A Theoretical Foundation for the Gravity Equation,” American Economic Review, 69, 1, 106-116.
Anderson, J., and van Wincoop, E., (2003) “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review, 93, 170-192.
Baier, S. L. and Bergstrand, J. H., (2007) “Do Free Trade Agreements Actually Increase Members’ International Trade?” Journal of International Economics, 71, 72-95.
Baltagi, B., Egger, P. H. and Pfaffermayr, M., (2003) “A Generalized Design for Bilateral Trade Flow Models,” Economics Letters, 80, 3, 391-397.
Bergstrand, J. H., (1985) “The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence,” Review of Economics and Statistics, 67, 474-481.
Brada, J. C. and Mendez, J. A., (1985) “Economic Integration among Developed, Developing and Centrally Planned Economies: A Comparative Analysis,” Review of Economics and Statistics, 67, 4, 549-556.
Carr, D. L., Markusen, J. E. and Markus, K. E., (2001) “Estimating Knowledge-Capital Model of the Multinational Enterprise,” American Economic Review, 91, 3, 691-708.
References
112/04/21 32
Deardorff, A.V., (1998) “Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?” in J. A. Frankel, Ed., The Regionalization of the World Economy, University of Chicago Press, Chicago.
Feenstra, R. C., (2002) Advanced International Trade, Princeton University Press, Princeton, New Jersey.
Frankel, F., Stein, E. and Wei, S., (1995) “Trading Blocs and Americas: The Natural, the Unnatural, and the Super-natural,” Journal of Development Economics, 47, 61-95.
Helpman, E., (1987) “Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries,” Journal of the Japanese and International Economies, 1, 1, 62-81.
Hummels, D. and Levinsohn, J., (1995) “Monopolistic Competition and International Trade: Reconsidering the Evidence,” Quarterly Journal of Economics, 110, 3, 799-836.
Mátyás, L., (1997) “Proper Econometric Specification of the Gravity Model,” The World Economy, 20, 363-368.
References
112/04/21 33
Thank you very much.