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The Role of History in Bilateral Trade Flows

In: The Regionalization of the World Economy

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  • Barry Eichengreen
  • Douglas A. Irwin

Abstract

This paper investigates the theory and evidence that history plays a role in shaping the direction of international trade. Because there are reasons to anticipate a positive correlation between the predominant direction of trade flows in the past and membership in preferential arrangements in the present, there may be a tendency to spuriously attribute to preferential arrangements the effects of historical factors and to exaggerate the influence of the former. Thus, the standard gravity-model formulation, which neglects the role of historical factors, suffers from omitted-variables bias. We illustrate these points by analyzing the evolution of trade between 1949 and 1964. We find that historical factors exercise an important influence on trade even after controlling for the arguments of the standard gravity model.

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This chapter was published in:

  • Jeffrey A. Frankel, 1998. "The Regionalization of the World Economy," NBER Books, National Bureau of Economic Research, Inc, number fran98-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7819.

    Handle: RePEc:nbr:nberch:7819

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    1. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
    2. Jeffrey A. Frankel & Ernesto Stein & Shang-Jin Wei, 1998. "Continental Trading Blocs: Are They Natural or Supernatural?," NBER Chapters, in: The Regionalization of the World Economy, pages 91-120 National Bureau of Economic Research, Inc.
    3. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, vol. 78(4), pages 773-85, September.
    4. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    5. Jeffrey Frankel, Ernesto Stein and Shang-jin Wei., 1994. "Trading Blocs: The Natural, the Unnatural, and the Super-Natural," Center for International and Development Economics Research (CIDER) Working Papers C94-034, University of California at Berkeley.
    6. Bean, Charles R, 1987. "Sterling Misalignment and British Trade Performance," CEPR Discussion Papers 177, C.E.P.R. Discussion Papers.
    7. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
    8. Tamim Bayoumi & Barry J. Eichengreen, 1995. "Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA," IMF Working Papers 95/109, International Monetary Fund.
    9. Deardorff, Alan V., 1984. "Testing trade theories and predicting trade flows," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 10, pages 467-517 Elsevier.
    10. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May.
    11. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September.
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