The Extensive Margin of International Trade in a Transition Economy: The Case of Mongolia

Using the Kehoe and Ruhl (2013) methodology, we investigate whether the variety of traded goods, which is the extensive margin of trade, has actually changed in a transition economy, such as Mongolia, as predicted by recent theoretical models. Answering this question would be interesting especially for the transition economies that still have an observer status in the World Trade Organization (WTO). We find large increases in the extensive margin of Mongolia fs trade with 10 major trade partners from 1997 to 2002, when Mongolia was undergoing significant structural reforms. We also find further increases in the extensive margin for the Mongolia-China and Mongolia-EU pairs after trade liberalizations due to China fs accession to the WTO (2001) and Mongolia fs eligibility for the EU Generalized Systems of Preferences (GSP+) scheme (2005). We, however, find no or relatively small further increases in the extensive margin for the Mongolia-Russia pair during the period 2002 to 2007, when there was no major change in the trade regime of these two countries. Our robustness checks indicate that methodologies other than that of Kehoe and Ruhl fs overstate the extensive margin growth in Mongolia with small trade relationships.