Economic Similarity and

1

• Economic Similarity and
• Bilateral Trade

By I-Hui Cheng (???) Department of Applied
Economics, National University of Kaohsiung,
Taiwan
2
Summary

• 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.

3
The current trend in world economy

• 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.

4
The current trend in world economy
Value of intra-trade (in millions of dollars) Value of intra-trade (in millions of dollars) Value of intra-trade (in millions of dollars) Value of intra-trade (in millions of dollars) Value of intra-trade (in millions of dollars) Value of intra-trade (in millions of dollars) 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
5
The current trend in world economy
Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group Value of intra-trade as percentage of each group
Trade Groups 1980 1990 1995 2000 2005 2008 2010 2011
CEMAC 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 52.0
ECOWAS 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 78.8
CACM 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 19.2
LAIA 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 39.8
NAFTA 79.0 87.4 91.0 90.5 88.0 86.1 85.2 84.4
ASEAN 29.0 42.0 39.1 39.5 39.0 38.8 36.8 36.3
SAARC 14.9 13.3 13.9 15.6 14.2 13.1 12.2 11.8
EFTA 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 88.9
Euro zone 70.6 71.8 69.9 68.9 67.3 66.8 67.6 66.8
APEC .. .. .. .. .. ..
6
The literature

• 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

7
The literature

• 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.

8
The bilateral trade model

• The gravity-type equation of bilateral trade
• Pöyhönen (1963), Linnemann (1966).
• Typical type
• Frictionless type

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?

10
On the statistical specification

• 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

11
The empirical gravity-type models

• 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)

12
Arbitrary preferences
Deardorff (1998)

• ?k good ks share of the world market
• aik exporter is production share
• ßjk importer js consumption share
• the difference between the average.

13
Impeded trade
Deardorff (1998)

• where
• tij transport cost of the Samuelson iceberg
  form
• ?h country share of the world income
• ?ij the TC weighted with the average distance
  d,

14
Economic similarity

• Economic size

• Per capita GDP
• Bilateral export
• Bilateral import

15
Related empirical topics

• Linder hypothesis
• Intra-industry trade
• Dispersion or similarity
• Openness

16
The data

• 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).

17
Correlation matrix of economic similarity
variables
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
18
The empirical results

• Basic model REI dummies similarity
• Modified model REI dummies similarity
• Bilateral trade in East Asia (exercise)

19
The estimation results
Table 2 Pooled model-CS Pooled model-CS Pooled model-CS Pooled model-CS Pooled model-CS Pooled model-CS
Table 2 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)
lngdpi 1.459 (0.008) 1.417 (0.007) 1.282 (0.006) 1.252 (0.006) 1 1
lngdpj 1.085 (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)
language 0.899 (0.026) 0.903 (0.026) 0.860 (0.027) 0.869 (0.026) 0.751 (0.027) 0.808 (0.026)
adjacency 0.358 (0.063) 0.290 (0.062) 0.215 (0.064) 0.165 (0.062) 0.353 (0.065) 0.283 (0.064)
20
Table 2 Pooled model-CS Pooled model-CS Pooled model-CS Pooled model-CS Pooled model-CS Pooled model-CS
Table 2 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)
SEAFTA 2.796 (0.180) 2.393 (0.176) 2.463 (0.183) 2.075 (0.178) 2.401 (0.187) 2.026 (0.181)
MERCOSUR 2.147 (0.163) 2.230 (0.159) 2.066 (0.166) 2.164 (0.162) 1.633 (0.169) 1.886 (0.164)
SIM_GDP 0.892 (0.131)   1.080 (0.134)   0.493 (0.132)  
SIM_YPC 1.261 (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)
21
Table 3 FE2 (ij, t) FE2 (ij, t) FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t) FEM (i, j, t) FEM (i, j, t)
Table 3 I II I II I II I II
constant 32.34 (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)
lngdpi 1.520 (0.053) 1.820 0.050) 1 1 1.743 (0.074) 1.889 (0.073) 1.678 (0.065) 1.819 (0.065)
lngdpj 1.467 (0.052) 1.323 (0.051) 1 1 1.453 (0.075) 1.389 (0.076) 1.459 (0.066) 1.353 (0.068)
Lnpopi 0.411 (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)
Lnpopj 0.032 (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)
Language 0.848 (0.026) 0.749 (0.026)
Adjacency -0.341 (0.054) -0.241 (0.054)
22
Table 3 FE2 (ij, t) FE2 (ij, t) FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t) FEM (i, j, t) FEM (i, j, t)
Table 3 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_2 0.309 (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_2 0.046 (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_2 0.268 (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)
23
Table 3 FE2 (ij, t) FE2 (ij, t) FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t) FEM (i, j, t) FEM (i, j, t)
Table 3 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_ypc 13.81 (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_export 2.859 (0.059) 2.854 (0.059) 2.181 (0.060) 1.160 (0.055)
sim_import 2.438 (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
24
The estimation results (using IV)
Table 4 Pooled model-CS Pooled model-CS FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t)
Table 4 I II I II I II
lngdpi 1.461 (0.008) 1 1.740 (0.051) 1 1.820 (0.074) 1
lngdpj 1.106 (0.007) 1 1.320 (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)
25
The estimation results (using IV)
Table 4 Pooled model-CS Pooled model-CS FE2 (ij, t) FE2 (ij, t) FEM (i, j, t) FEM (i, j, t)
Table 4 I II I II I II
lngdpi 1.461 (0.008) 1 1.740 (0.051) 1 1.820 (0.074) 1
lngdpj 1.106 (0.007) 1 1.320 (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)
26
The empirical exercise for research students
27
The empirical exercise(Model FCW (ij, t), I.)
exporter importer 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
28
The empirical exercise (Model FCW (ij, t), II.)
exporter importer 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
29
The empirical exercise Model FCW (ij, t), I
using instrument variables.
exporter importer 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
30
The conclusion

• Economic similarity does matter in the formation
  of REI.
• Using endogenous REI dummies leads to different
  results.

31
References

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32
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33

• Thank you very much.