Does Specialization Matter for Trade Imbalance at Industry Level?

E. Young Song () and Chen Zhao ()
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Chen Zhao: Hong Kong University of Science and Technology

East Asian Economic Review, 2012, vol. 16, issue 3, 227-247

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.

Keywords: Trade imbalance; Gravity theory; Specialization; Output share; Homogeneous products (search for similar items in EconPapers)
JEL-codes: F11 F12 F14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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http://dx.doi.org/10.11644/KIEP.JEAI.2012.16.3.249 Full text (application/pdf)

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Working Paper: Does Specialization Matter for Trade Imbalance at Industry Level? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0069

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