Does Specialization Matter for Trade Imbalance at Industry Level?
This paper investigates the source of bilateral trade imbalance at industry level. We build a simple model based on gravity theory and derive the prediction that the bilateral trade balance in an industry is increasing in the difference between trading partners in the output share of the industry. We test this prediction and find that the difference in industry share is highly significant in predicting both the sign and the magnitude of trade balance at industry level. We also find that FTAs tend to enlarge trade imbalance at industry level. However, the overall predictive power of the model is rather limited, suggesting that factors other than production specialization are important in determining trade balance at industry level. Another finding of the paper is that the influence of the difference in industry share on trade balance increases as we move to industries that produce more homogeneous products. This finding calls into question monopolistic competition as the main driver of gravity in international trade.
|Date of creation:||Aug 2012|
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- E. Young Song, 2010. "On Gravity,Specialization and Intra-industry Trade," Working Papers 1007, Research Institute for Market Economy, Sogang University.
- Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank. Full references (including those not matched with items on IDEAS)
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