The Gravity Approach for Trade Diversification in Central Asia MAENO Takaaki, Nihon University Workshop on Economic development of New Silk Road 26 – 27 August, 2011

Motivations Two main motivations – It is to reveal an important characteristics of trade structure for Central Asian countries that locate at the geographically middle of the new silk road. – It is to clarify the impact of trade costs on trade flows for landlocked countries through measuring trade costs and estimating the determinants of them. And also, we will give some implications of economic development for countries on new silk road. We focus on the trade structure of Central Asian countries.

Outline １． Introduction ２． Being Landlocked and Trade Cost ３． An Analysis of Trade Structure of Central Asia ４． Panel Data Analysis ５． Conclusion

the Caucasus region

１． Introduction Since the late 1980s, MNEs in the developed countries, including Japanese firms, expands their business overseas, and East Asian countries have achieved high economic growth through production process sharing. Decreasing Trade Costs – One of the main reasons for trade expansion in East Asia is due to decreasing in trade costs What about the trade structure of Central Asian countries?

２． Being landlocked and Trade costs(1) Taking the concept of “Firm heterogeneity” into international trade theory, it is becoming empirically more important to analyze many kinds of trade costs as one of the factors to disturb trade. – Tariff, Distance, Remoteness, Being Landlocked, Institution, Time, Infrastructure, Language, etc. Many countries are facing many trade costs, but “Being landlocked” is one of the largest trade costs. Early Studies Kurmanalieva (2008) – Focusing on the trade pattern of Kyrgyzstan, he empirically explains that the traditional trade theory and even the intra-industry trade theory cannot explain the trade structure in Kyrgyzstan Iwata, Kato, Shibasaki (2010) – They analyze the relations between transport costs and economic growth in Mekong regions Behar&Venables (2010) – They test and explain the geographical factors, being landlocked, seriously matters for trade.

2.Being Landlocked and Trade cost(2) Why do landlocked countries/regions face higher trade costs than other non- landlocked countries/regions? – 5 countries in Central Asia are landlocked countries, so they export/import via the third country. – Their potential trade cost is relatively higher than coastal countries.

2.Being Landlocked and Trade cost(3) Coulibaly & Fontagné (2004) model – They decompose distance factors and introduce the third country effects into trade model. ① Regional context 1.A border factor （ which can be proxied by the number of borders to be crossed by the shipped good ） 2.A distance factor （ which can be proxied by the road distance between the two trade countries ） 3.A transit factor （ which can be approximated by the road distancefrom the first border to the last border crossed by the imported good ） 4.An infrastructure factor （ which can be estimated by the presence of paved roads between the two trading partners ） ② Extra-regional context 1.Extra-regional distance （ to be crossed the imported good before reaching the developing region ） 2.Inland distance （ Distance to be crossed by imported good within the developing region ）

2.Being Landlocked and Trade cost （ 4 ） Ｎｏｔｅ： Coulibaly & Fontagné (2004)

2.Being Landlocked and Trade cost （ 5 ）

３． An Analysis of Trade Structure of Central Asia （１） ＲＣＡ Export Similarity Index Trade Decomposition

3.1 ＲＣＡ Compare comparative advantages taking into account of the characteristics of traded products. – EX : export value – i : exporter – m : a characteristic of products based on BEC – k : traded goods – W : world – t : period 13

ＲＣＡ： Primary Goods

ＲＣＡ： Parts & Components

3.1 ＲＣＡ（２） East Asian countries have comparative advantages in P&C that is relatively higher-value added. Central Asian countries have comparative advantage in primary good that is relatively low-value added.

3.2 Export Similarity Index(1) Export Similarity Index It measures the difference in the export pattern of countries a and b to market c, and it assesses the intensity of competition in exports between various countries to the third market. (Finger & Kreinin,1979, Lee, 1997) – If the commodity distributions of the exports of a and b are identical, then the index can take on a value of 0, and it means the trade structures for country a and b are quite similar and they face more competition at the market in country c.

3.2 Export Similarity Index (2)

3.2 Export Similarity Index (3)

3.2 Export Similarity Index (4) For ASEAN5, they face quite higher competition in the U.S. and EU market in 1996, but they shift the market to East Asia. It is strongly associated with the development of production fragmentation in East Asia. Compared to ASEAN5, there is almost no international competition in the global market for Central Asian countries. Their industrial structures are different They are relatively less advanced in industrial advances They trade the different characteristics of products They are facing higher trade costs

3.3 Decomposition of Trade （１） Decomposition of export values – We follow the definition of both extensive and intensive margins in Hummels(2009). – Intensive margin: trade volume of products that have already traded in earlier period – Extensive margin: trade volume of products that are newly traded in earlier period – TV : the aggregated value of export for country i at time t (from 1996 to 2007). – N : the number of unique shipments of exported product k to country j at time t. – TV/N : the average value per unique shipment. 21

3.3 Decomposition of Trade （ 2 ） Taking a concept of trade partner into trade decomposition,,,, » TV : the aggregated value of export for country i at time t. » N : the number of unique shipments of exported product at time t. » : average number of trading partner per product » : average export value per product-partner 22

3.3 Decomposition of Trade （ 3 ）

3.3 Decomposition of Trade （ 4 ） Their trade structure have been diversified at the aggregated level. The number of traded products and partners increases and also the export values per product and per partner increases.

4. Panel data analysis(1) Following the definition of both extensive and intensive margin in Hummels(2009), we use a simple gravity model as… i, j, and t, represent exporter(5 Central Asian countries), partner countries, time (from 1996 to 2007), respectively. 25

4. Panel data analysis(2) Expected sign

Estimation results

Interpretation We can explain the export of Central Asian countreis through the simple gravity model Market size: GDP, GDPP – They export relatively larger market and higher income countries. Economic Openness ： Remoteness, FDI, Tariff – They export to the relatively higher economic openness – Some countries which have neighbor countries with a higher volume of trade (low remoteness) and accept FDI from many other countries have higher economic openness Trade costs ： Distance, Infrastructure – They export to the countries with an improvement of infrastructure. – Distance is still important factors for trade growth, according to the Coulibaly & Fontagné (2004)model.

Export share by market Source: UN Comtrade and WDI Note ： Those share are Based on author’s calculation.

5. Ｃｏｎｃｌｕｓｉｏｎ s and future work Our studies show that the Central Asian countries have stronger comparative advantages for primary goods, but comparing to East Asian countries, they still face lower international competition. The gravity model can simply explain the trade diversification for the Central Asian countries. We clarify the negative relations between export and trade costs, especially infrastructure. So, it is important to decrease trade costs (ex. improve infrastructure) in order to trade growth and economic development. For the future work, we will measure and estimate some determinants of trade costs in order to lead the some implications to decrease trade costs and to achieve economic development for the related countries.

(source) World Bank

Reference Tsuji, T., N.Ijiri, Y.Wu, M.Honda, and Y.Riku （ 2008 ）， ”Forming Beads-type Industrial Cities along New Silk Road”, CCAS Working Paper Series No.009. Anderson, J. and van, Wincoop,E. (2003), “Gravity with Gravitas: A solution to the Border Puzzle”, American Economic Review, 93(1), pp Behar, A. and A. Venables (2010), “Transport costs and International Trade”, University of Oxford, Department of Economics Discussion Paper Series, Number 488. Chaney, T. (2008), “Distorted Gravity: The Intensive and Extensive Margins of International Trade”, American Economic Review, Vol. 98(4), pp Coulibaly, S. and L. Fontagné (2004), “South-South Trade: Geography Matters”, CEPII Working Papers, No Finger, J. M. & M. E. Kreinin (1979), “A measure of ‘export similarity’ and its possible use”, The Economic Journal, Vol. 89, pp Hummels, D. (2009), “Trends in Asian trade: implications for transport infrastructure and trade costs”, in D. H. Brooks and D. Hummels(eds.), Infrastructure’s Role in Lowering Asia’s Trade Costs, ADB Institute and Edward Elgar Publishing. Iwata, Kato, Shibasaki (2010), “Impact of International Transportation Infrastructure Development on a Landlocked Country: Case Study in the Greater Mekong Subregion”, Proceedings of the 3 rd International Conference on Transportation and Logistics(T-LOG2010), CD-ROM, Fukuoka, Japan. Kurmanalieva, E. (2008), “Empirical Analysis of Kyrgyz Trade Patterns”, Eurasian Journal of Business and Economics, 1(1), pp Limao, N. and A. Venables (1999), “Infrastructure, Geographical Disadvantage, Transport Costs and Trade”, World Bank Policy Working Paper Shepherd & Wilson (2006), “Road Infrastructure in Europe and Central Asia: Does Network Quality Affect Trade?”, World Bank Policy Working Paper 4104.