Technological proximity and the mitigation of trade costs

This paper develops a theoretical and empirical framework for analysing how technological proximity shapes bilateral trade flows. We model technological alignment as a source of reduced effective trade costs and embed it within a structural gravity setting. Using a novel dataset combining sector-level patent information and OECD trade data for 76 countries across 45 sectors over the 1996-2020 period, we construct a granular measure of technological proximity based on revealed technological advantage. Estimating high-dimensional fixed effects gravity models, we find that technological proximity has a positive and economically significant impact on bilateral exports. Instrumental-variable estimates based on shift-share global technology shocks indicate that baseline results are attenuated by endogeneity. We further show that technological proximity mitigates the trade-reducing effects of compliance-intensive regulatory non-tariff measures, particularly sanitary and phytosanitary measures, while having limited interaction with tariffs. In non-services sectors, a 0.1 increase in technological proximity has an export effect comparable to lowering the gross tariff factor by about 6%-7%. Finally, we document substantial regional and sectoral heterogeneity, showing that the trade-enhancing effects of technological proximity are strongest when countries are connected to technological frontier economies and vary markedly across industries. Partial-equilibrium welfare counterfactuals imply positive but modest gains from targeted technological-alignment shocks. The findings highlight the central role of technological compatibility in shaping global trade patterns.