2016/1/41 Economic Similarity and Bilateral Trade By I-Hui Cheng ( 鄭義暉 ) Department of Applied Economics, National University of Kaohsiung, Taiwan

2016/1/42 This research uses the bilateral trade information from 1986 to 2008 and the common types of trade gravity models, such as the traditional cross-sectional model, three-way fixed effects model, and bilateral fixed effects model, to re-examine bilateral trade flow determinants. This article assumes that the trading economies’ similarity and the bilateral trade volumes’ similarity in percentage over foreign trade with each other, contribute to the parties’ willingness to be involved in the same regional trade group. Economic similarity does matter in the formation of REI. Using endogenous REI dummies leads to different results. Summary

2016/1/43 Regional economic integration  As of May, 2012, there have been 489 regional trade agreements proposed to WTO; 357 of which have been notified according to the 24th clause in General Agreement on Tariffs and Trade (GATT); 92 of them was proposed according to the 5th clause in the General Agreement for Trade of Service (GATS) and 31 of them were proposed according to the enabling clause Trade within the region occupies a high proportion of the total trade value. The current trend in world economy

2016/1/44 Value of intra-trade (in millions of dollars) Trade Groups CEMAC COMESA 5691,3731,5183,0245,9999,5387,776 ECOWAS 6611,8752,7155,4979,0738,87411,928 SADC 1104,4275,91610,73018,98119,39320,121 CACM 1,1741,5942,5864,3426,6065,5496,105 CARICOM ,0762,0874,2832,4812,973 LAIA 11,19235,98644,25371,720138,532130,289161,267 MERCOSUR ,19917,82921,12843,55343,78253,663 NAFTA 102,218394,472676,142824,6581,013,258955,3151,101,189 ASEAN 12,41379,54498,060165,458255,467263,024311,033 SAARC 7682,1722,9818,77515,07716,60320,123 EFTA ,2522,9102,0882,945 EU 499,5701,419,1981,641,2522,732,1593,972,3063,329,9713,869,925 Euro zone 309,1509,029,52976,9291,629,9142,301,1831,945,7332,243,062 APEC 357,6981,688,7062,262,7113,310,7534,694,7814,874,7145,680,394 The current trend in world economy

2016/1/45 Value of intra-trade as percentage of each group Trade Groups CEMAC COMESA ECOWAS SADC CACM CARICOM LAIA MERCOSUR NAFTA ASEAN SAARC EFTA EU Euro zone APEC.. The current trend in world economy

2016/1/46 The Dummy Variable Approach  Integration schemes in western Europe [Aitken, 1973; Mayes, 1978; Nelsson, 2000]  Imperfect competition [Bergstrand, 1985,1989]  Currency volatility [Thursby & Thursby, 1987; Frankel and Wei, 1998].  Different regional blocs [Bayoumi & Eichengreen, 1997; Frankel et al., 1995,1998; Egger, 2004]  2-stage REI dummies [Baier & Bergstrand, 2007] The literature

2016/1/47 The Heterogeneity Does Matter  Helpman (1987): Imperfect competition  Hummels & Levinsohn (1995): Monopolistic competition + IIT.  Mátyás, L. (1997) : The heterogeneity of trader  Cheng & Wall (1999,2005) & Feenstra (2002): The heterogeneity of bilateral trade relationships  Baltagi et al (2003): The heterogeneity of bilateral trade relationships, and traders.  Egger: 2SLS approach: use REI twice. The literature

2016/1/48 The gravity-type equation of bilateral trade  Pöyhönen (1963), Linnemann (1966).  Typical type:  Frictionless type: The bilateral trade model

2016/1/49 Discussion on Relative distance as the proxies of transport costs Relative distance between two places  The cost of overcoming the friction of absolute distance,  Social, cultural and economic connectivity. Conventional explanatory variables include:  Distance, language, common border, economic agreement, political alliance, religion, etc. How to find better ones?

2016/1/410 Available Models  Cross-sectional Model Single CS Pooled CS [in this paper]  Difference Model  Fixed-effect Model Two-way FE [in this paper] Three-way FE [in this paper] On the statistical specification

2016/1/411 The basic model (Mátyás (1997), Model FEM) Cheng & Wall (1999,2005), Feenstra (2002) (Model FCW) : Carr, Markusen & Markus (2001), Anderson & van Wincoop (2003), Baltagi, Egger & Pfaffermayr (2003) (Model BEP) : The empirical gravity-type models

2016/1/412 Deardorff (1998): λ k : good k’s share of the world market α ik : exporter i’s production share β jk : importer j’s consumption share “~”: the difference between the average. Arbitrary preferences

2016/1/413 Deardorff (1998): where t ij : transport cost of the Samuelson iceberg form θ h : country’ share of the world income ρ ij : the TC weighted with the average distance δ, Impeded trade

2016/1/414 Economic size: Per capita GDP Bilateral export Bilateral import Economic similarity

2016/1/415  Linder hypothesis  Intra-industry trade  Dispersion or similarity  Openness Related empirical topics

2016/1/416 The exporting value of 41 exporting countries and 57 importing countries, from 1986 to 2008, 52,486 obs.; 2282 pairs. Data resources: IMF DOTS, ; The WDI Indicators REI dummies: The European Union (EU), The Euro Zone (EURO), North American FTA (NAFTA), the South American Common Market (MERCUSOR), and the ASEAN Free Trade Area (AFTA). The data

2016/1/417 Table 1 sim_gdpsim_popsim_ypcsim_x_xisim_m_mi sim_gdp sim_pop sim_ypc sim_x_xi sim_m_mi Correlation matrix of economic similarity variables

2016/1/418 Basic model ＋ REI dummies ＋ similarity Modified model ＋ REI dummies ＋ similarity Bilateral trade in East Asia (exercise) The empirical results

2016/1/419 The estimation results Table 2 Pooled model － CS IIII I constant * (0.674) 2.871* (0.297) * (0.675) (0.396) 2.374* (0.666) 5.567* (0.302) lngdpi 1.459* (0.008) 1.417* (0.007) 1.282* (0.006) 1.252* (0.006) 11 lngdpj 1.085* (0.007) 0.990* (0.007) 1.004* (0.006) 0.923* (0.005) 11 lnpopi * (0.008) * (0.007) * (0.006) * (0.006) lnpopj * (0.008) * (0.007) * (0.006) * (0.006) lndistij * (0.014) * (0.014) * (0.015) * (0.014) * (0.015) * (0.015) language 0.899* (0.026) 0.903* (0.026) 0.860* (0.027) 0.869* (0.026) 0.751* (0.027) 0.808* (0.026) adjacency 0.358* (0.063) 0.290* (0.062) 0.215* (0.064) 0.165* (0.062) 0.353* (0.065) 0.283* (0.064)

2016/1/420 Table 2 Pooled model － CS IIII I EU * (0.056) * (0.055) * (0.056) * (0.055) (0.057) * (0.055) EURO ^ (0.089) ^ (0.087) (0.091) ^ (0.088) * (0.092) * (0.090) NAFTA * (0.213) (0.208) ^ (0.217) (0.211) (0.220) 0.359^ (0.214) SEAFTA 2.796* (0.180) 2.393* (0.176) 2.463* (0.183) 2.075* (0.178) 2.401* (0.187) 2.026* (0.181) MERCOSUR 2.147* (0.163) 2.230* (0.159) 2.066* (0.166) 2.164* (0.162) 1.633* (0.169) 1.886* (0.164) SIM_GDP 0.892* (0.131) 1.080* (0.134) 0.493* (0.132) SIM_YPC 1.261* (0.479) * (0.467) (0.483) * (0.470) * (0.494) * (0.476) SIM_EXPORT 2.058* (0.057) 2.123* (0.058) 1.987* (0.058) SIM_IMPORT 1.256* (0.056) 1.448* (0.057) 1.643* (0.056)

2016/1/421 Table 3 FE2 (ij, t) FEM (i, j, t) IIII I I constant 32.34* (4.440) * (1.701) 45.42* (4.165) * (1.540) * (3.083) * (2.946) (2.708) * (2.642) lngdpi 1.520* (0.053) ) * (0.074) 1.889* (0.073) 1.678* (0.065) 1.819* (0.065) lngdpj 1.467* (0.052) 1.323* (0.051) * (0.075) 1.389* (0.076) 1.459* (0.066) 1.353* (0.068) Lnpopi 0.411* (0.061) 0.343* (0.057) 0.502* (0.061) 0.485* (0.058) 0.285* (0.087) 0.212* (0.085) 0.242* (0.076) 0.197* (0.076) Lnpopj (0.087) 0.243* (0.084) (0.087) 0.214* (0.084) 0.432* (0.108) 0.648* (0.106) 0.559* (0.094) 0.739* (0.094) Lndistij * (0.014) * (0.014) Language 0.848* (0.026) 0.749* (0.026) Adjacency * (0.054) * (0.054)

2016/1/422 Table 3 FE2 (ij, t) FEM (i, j, t) IIII I I eu_ * (0.078) (0.075) * (0.079) * (0.075) 1.093* (0.055) 0.996* (0.054) * (0.051) * (0.051) euro_ * (0.069) * (0.066) * (0.069) * (0.066) (0.087) (0.085) (0.076) (0.076) nafta_ (0.264) (0.254) (0.265) (0.254) 2.501* (0.203) 1.807* (0.199) 1.101* (0.181) 0.512* (0.181) seafta_ (0.139) (0.133) (0.139) (0.133) 2.764* (0.173) 2.537* (0.170) 0.106* (0.153) (0.154) sacu_ (0.171) 0.486* (0.164) (0.171) 0.343* (0.165) 5.043* (0.153) 4.785* (0.151) 2.132* (0.139) 2.198* (0.140)

2016/1/423 Table 3 FE2 (ij, t) FEM (i, j, t) IIII I I sim_gdp * (0.802) * (0.770) * (0.179) * (0.157) sim_ypc 13.81* (1.419) 6.863* (1.367) 15.86* (1.413) 8.924* (1.367) 3.714* (0.517) * (0.506) * (0.457) * (0.457) sim_export 2.859* (0.059) 2.854* (0.059) 2.181* (0.060) 1.160* (0.055) sim_import 2.438* (0.067) 2.374* (0.067) 1.576* (0.060) 0.608* (0.054) Observations Parameters log-likelihood Adj R-squared Akaike Info. Crt Bay. Info. Crt

2016/1/424 The estimation results (using IV) Table 4 Pooled model － CSFE2 (ij, t)FEM (i, j, t) IIII I lngdpi 1.461* (0.008) * (0.051) * (0.074) 1 lngdpj 1.106* (0.007) * (0.053) * (0.078) 1 lnpopi * (0.008) * (0.007) 0.316* (0.060) 0.430* (0.059) 0.265* (0.087) 0.396* (0.086) lnpopj * (0.009) * (0.007) 0.503* (0.073) 0.544* (0.073) 0.546* (0.106) 0.605* (0.106) eu_ * (0.054) 1.614* (0.054) (0.078) * (0.078) 1.096* (0.054) 1.076* (0.054) euro_ ^ (0.096) * (0.099) ^ (0.068) * (0.068) (0.087) (0.087) nafta_ * (0.224) 1.908* (0.231) (0.263) (0.263) 2.150* (0.203) 2.127* (0.203) seafta_ * (0.192) 4.097* (0.198) (0.138) (0.138) 2.788* (0.174) 2.924* (0.173) sacu_ * (0.167) 3.780* (0.172) 0.277^ (0.170) (0.170) 5.077* (0.154) 5.026* (0.154)

2016/1/425 The estimation results (using IV) Table 4 Pooled model － CSFE2 (ij, t)FEM (i, j, t) IIII I lngdpi 1.461* (0.008) * (0.051) * (0.074) 1 lngdpj 1.106* (0.007) * (0.053) * (0.078) 1 lnpopi * (0.008) * (0.007) 0.316* (0.060) 0.430* (0.059) 0.265* (0.087) 0.396* (0.086) lnpopj * (0.009) * (0.007) 0.503* (0.073) 0.544* (0.073) 0.546* (0.106) 0.605* (0.106) eu_ * (0.054) 1.614* (0.054) (0.078) * (0.078) 1.096* (0.054) 1.076* (0.054) euro_ ^ (0.096) * (0.099) ^ (0.068) * (0.068) (0.087) (0.087) nafta_ * (0.224) 1.908* (0.231) (0.263) (0.263) 2.150* (0.203) 2.127* (0.203) seafta_ * (0.192) 4.097* (0.198) (0.138) (0.138) 2.788* (0.174) 2.924* (0.173) sacu_ * (0.167) 3.780* (0.172) 0.277^ (0.170) (0.170) 5.077* (0.154) 5.026* (0.154)

2016/1/426 The empirical exercise for research students

2016/1/427 The empirical exercise (Model FCW (ij, t), I.) exporter importer CHNHKGIDOJPYKORMYSPHLSGPTHL CHN HKG IDO JPY KOR MYS PHL SGP THL

2016/1/428 The empirical exercise (Model FCW (ij, t), II.) exporter importer CHNHKGIDOJPYKORMYSPHLSGPTHL CHN HKG IDO JPY KOR MYS PHL SGP THL

2016/1/429 The empirical exercise Model FCW (ij, t), I: using instrument variables. exporter importer CHNHKGIDOJPYKORMYSPHLSGPTHL CHN HKG IDO JPY KOR MYS PHL SGP THL

2016/1/430 Economic similarity does matter in the formation of REI. Using endogenous REI dummies leads to different results. The conclusion

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2016/1/432 Deardorff, A.V., (1998) “Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?” in J. A. Frankel, Ed., The Regionalization of the World Economy, University of Chicago Press, Chicago. Feenstra, R. C., (2002) Advanced International Trade, Princeton University Press, Princeton, New Jersey. Frankel, F., Stein, E. and Wei, S., (1995) “Trading Blocs and Americas: The Natural, the Unnatural, and the Super-natural,” Journal of Development Economics, 47, Helpman, E., (1987) “Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries,” Journal of the Japanese and International Economies, 1, 1, Hummels, D. and Levinsohn, J., (1995) “Monopolistic Competition and International Trade: Reconsidering the Evidence,” Quarterly Journal of Economics, 110, 3, Mátyás, L., (1997) “Proper Econometric Specification of the Gravity Model,” The World Economy, 20, References

2016/1/433 Thank you very much.