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Regionalization, Changes in Home Bias, and the Growth of World Trade

  • John Whalley
  • Xian Xin

In this paper we use numerical modeling methods to quantitatively assess the impacts of changes in home bias within regions on the growth of world trade among major blocs over the last three decades. Existing work focuses on the impacts of trade barrier, transport cost and income changes on trade growth, rather than preferences. Removing changes in home bias over the last three decades from our global general equilibrium model reduces world trade by 27% compared to actual world trade in 2004 in our central case scenario. These results support the view that world trade among major blocs has became more regionalized rather than internationalized which we suggest may be due to a proliferation of free trade agreements. We calibrate a simple global trade model of inter bloc trade to both 1975 and 2004 data and substitute different calibrated parameters from the two data sets between model parameterizations. Our results suggest that if changes over time in home bias involving different regionally sourced goods in a multi-region multi product model are removed, substantial effects follow for the growth of world trade in the last three decades. Home bias changes in developed and developing economies reduce world trade by 8% and 19% respectively, suggesting that regionalization is more pronounced in developing country trade. Our results also indicate that income growth, income convergence, and falling trade costs explain 76%, 4%, and 7% respectively of the growth of world trade over the last three decades.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13023.

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Date of creation: Apr 2007
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Handle: RePEc:nbr:nberwo:13023
Note: ITI
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  1. David Hummels & James Levinsohn, 1993. "Monopolistic Competition and International Trade: Reconsidering the Evidence," NBER Working Papers 4389, National Bureau of Economic Research, Inc.
  2. James Harrigan & Anthony J. Venables, 2004. "Timeliness, Trade and Agglomeration," CEP Discussion Papers dp0616, Centre for Economic Performance, LSE.
  3. Carolyn L. Evans & James Harrigan, 2003. "Distance, Time, and Specialization," NBER Working Papers 9729, National Bureau of Economic Research, Inc.
  4. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  5. John Whalley & Xian Xin, 2006. "Home and Regional Biases and Border Effects in Armington Type Models," NBER Working Papers 12439, National Bureau of Economic Research, Inc.
  6. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
  7. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  8. Anne-Célia Disdier & Keith Head, 2004. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," Development Working Papers 186, Centro Studi Luca d\'Agliano, University of Milano.
  9. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
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