IDEAS home Printed from https://ideas.repec.org/p/sgo/wpaper/1210.html
   My bibliography  Save this paper

Does Specialization Matter for Trade Imbalance at Industry Level?

Author

Listed:
  • E. Young 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. Young Song & Chen Zhao, 2012. "Does Specialization Matter for Trade Imbalance at Industry Level?," Working Papers 1210, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
  • Handle: RePEc:sgo:wpaper:1210
    as

    Download full text from publisher

    File URL: https://tinyurl.com/yrqoasug
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    2. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
    3. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
    4. 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.
    5. 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.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. 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/Revue canadienne d'économique, John Wiley & Sons, vol. 34(2), pages 430-447, May.
    8. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
    9. David Hummels & James Levinsohn, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 799-836.
    10. 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.
    11. 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.
    12. E. Young Song, 2011. "On Gravity, Specialization and Intra‐industry Trade," Review of International Economics, Wiley Blackwell, vol. 19(3), pages 494-508, August.
    13. 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)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wenjing Zu & Guoda Gu & Sihan Lei, 2022. "Does Digital Transformation in Manufacturing Affect Trade Imbalances? Evidence from US–China Trade," Sustainability, MDPI, vol. 14(14), pages 1-14, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dennis Novy, 2013. "Gravity Redux: Measuring International Trade Costs With Panel Data," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 101-121, January.
    2. Chen, Natalie & Novy, Dennis, 2008. "International Trade Integration: A Disaggregated Approach," CEPR Discussion Papers 7103, C.E.P.R. Discussion Papers.
    3. Brülhart, Marius & Trionfetti, Federico, 2009. "A test of trade theories when expenditure is home biased," European Economic Review, Elsevier, vol. 53(7), pages 830-845, October.
    4. Kwok Tong Soo, 2013. "Intra-industry trade," Working Papers 33867578, Lancaster University Management School, Economics Department.
    5. Simone Juhasz Silva & Douglas Nelson, 2012. "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," The World Economy, Wiley Blackwell, vol. 35(5), pages 545-577, May.
    6. Chen, Natalie & Novy, Dennis, 2011. "Gravity, trade integration, and heterogeneity across industries," Journal of International Economics, Elsevier, vol. 85(2), pages 206-221.
    7. Güzin Bayar, 2018. "Estimating export equations: a survey of the literature," Empirical Economics, Springer, vol. 54(2), pages 629-672, March.
    8. Luigi Capoani, 2023. "Review of the gravity model: origins and critical analysis of its theoretical development," SN Business & Economics, Springer, vol. 3(5), pages 1-43, May.
    9. Kwok Tong Soo, 2016. "Intra-industry trade: A Krugman–Ricardo Model and Data," Economica, London School of Economics and Political Science, vol. 83(330), pages 338-355, April.
    10. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    11. Mario Larch & Pehr-Johan Norbäck & Steffen Sirries & Dieter M. Urban, 2016. "Heterogeneous Firms, Globalisation and the Distance Puzzle," The World Economy, Wiley Blackwell, vol. 39(9), pages 1307-1338, September.
    12. James Harrigan, 2001. "Specialization and the Volume of Trade: Do the Data Obey the Laws?," NBER Working Papers 8675, National Bureau of Economic Research, Inc.
    13. Cecilio R. Tamarit Escalona & Estrella Gómez, 2011. "The euro effect on trade: evidence in gravity equations using panel cointegration techniques," Working Papers. Serie EC 2011-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    14. Raphaël Chiappini, 2016. "Do overseas investments create or replace trade? New insights from a macro-sectoral study on Japan," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(3), pages 403-425, June.
    15. Raphael A. Auer, 2013. "Product Heterogeneity, Cross-Country Taste Differences, and the Consumption Home Bias," Working Papers 13.01, Swiss National Bank, Study Center Gerzensee.
    16. Treb Allen, 2014. "Information Frictions in Trade," Econometrica, Econometric Society, vol. 82, pages 2041-2083, November.
    17. Raphael Auer, 2009. "Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?," Working Papers 09.05, Swiss National Bank, Study Center Gerzensee.
    18. Armando Garcia Pires, 2012. "International trade and competitiveness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 727-763, August.
    19. Olga Solleder, 2013. "Trade Effects of Export Taxes," IHEID Working Papers 08-2013, Economics Section, The Graduate Institute of International Studies.
    20. Tibor Besedes & Thomas J. Prusa, 2004. "Surviving the U.S. Import Market: The Role of Product Differentiation," NBER Working Papers 10319, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    trade imbalance; gravity theory; specialization; output share; homogeneous products;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sgo:wpaper:1210. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jung Hur (email available below). General contact details of provider: https://edirc.repec.org/data/risogkr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.