The Role of Preferential Trade Agreement (PTA) between Iran and Malaysia in their Intra industry Trade (IIT)

Early trade liberalization in the East Asian newly industrialized economies took place against a backdrop of rapid growth. Later, following the instability of the international economy in the late 1970s/early 1980s, several developing countries adopted major economic reforms including trade liberalization somehow in the form of preferential trade agreements. Increasing openness and mutual trade relations are likely to be associated, not only with increasingly competitive product markets but also with intra industry trade (IIT), that is, the simultaneous exports and imports of products within the same industry. Intra industry specialization has attracted considerable attention in recent years, and an increasing number of researchers have developed econometric models to explain intra industry trade. This paper has two objectives. First it strives to calculate the extent of bilateral intra industry trade of Iran and Malaysia, using Grubel & Lloyd index at the 6-digit level of harmonized tariff schedule over the years 1997-2001. Secondly, some of the various sources of intra industry trade are combined in a panel gravity method to explore the impact of implementing any PTA between two countries on the bilateral Iran-Malaysia trade relations. The results of our econometric study support the hypotheses put forward in literature as far as the common characteristics of the countries in question are concerned. Thus, the regression coefficients of the average gross national income, Linder variable, average country size, inequality in country size, distance, and preferential trade agreement all have the expected sign and are statistically significant in 10 percent level in the fixed effect model. The findings support our hypothesis, showing that preferential trade agreement plays a significant role in the rapid increase of IIT between the two countries