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Does Specialization Matter for Trade Imbalance at Industry Level?

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  • E. Yong Song

    () (Department of Economics, Sogang University)

  • Chen Zhao

    () (Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong)

Abstract

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.

Suggested Citation

  • E. Yong Song & Chen Zhao, 2012. "Does Specialization Matter for Trade Imbalance at Industry Level?," Working Papers 1210, Research Institute for Market Economy, Sogang University.
  • Handle: RePEc:sgo:wpaper:1210
    as

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    References listed on IDEAS

    as
    1. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
    2. E. Young Song & Chan‐Hyun Sohn, 2012. "Intra‐industry Trade and Industry Distribution of Productivity: A Cournot–Ricardo Approach," The World Economy, Wiley Blackwell, vol. 35(4), pages 461-482, April.
    3. 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.
    4. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
    5. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
    6. Debaere, Peter, 2005. "Monopolistic competition and trade, revisited: testing the model without testing for gravity," Journal of International Economics, Elsevier, vol. 66(1), pages 249-266, May.
    7. Donald R. Davis & David E. Weinstein, 2002. "The Mystery of the Excess Trade (Balances)," American Economic Review, American Economic Association, vol. 92(2), pages 170-174, May.
    8. E. Young Song, 2011. "On Gravity, Specialization and Intra‐industry Trade," Review of International Economics, Wiley Blackwell, vol. 19(3), pages 494-508, August.
    9. Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank.
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    More about this item

    Keywords

    trade imbalance; gravity theory; specialization; output share; homogeneous products;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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