Does the Linder effect hold for differentiated agri-food and beverage product trade?

Using a generalized gravity equation, this study tests for the Linder effect in differentiated agri-food product trade, i.e. as the demand structures of two countries become more similar, their trade intensity increases. Two proxies of demand structure, the Balassa index and the absolute value of the difference in per capita Gross Domestic Products (GDPs) of trading partners, are used to capture the Linder effect. In addition, two measures of bilateral trade, the Grubel and Lloyd (GL) index, and the value of bilateral trade are used as the dependent variable. This study investigates the role of the Linder effect in explaining the trade of 37 differentiated agri-food and beverage products categorized into eight product groups: cereals, fresh fish, frozen fish, vegetables, fresh fruit, processed fruit, tea and coffee and alcoholic beverages. The data covers trade across 52 developed and developing countries from 1990 to 2000. The type of proxy used for the Linder effect and the way in which bilateral trade is measured influence the outcome of the statistical tests for the Linder effect. The Linder effect for cereals, frozen fish, vegetables, processed fruits and tea and coffee, using the value of trade as the dependent variable, is often accepted, but it is generally rejected when the GL index is used as the measure of trade intensity. In brief, the results do not provide strong support for the Linder effect in the trade of differentiated agri-food products.