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

2. 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

3. 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

4. 2016/1/44 Value of intra-trade (in millions of dollars) Trade Groups 1980199520002005200820102011 CEMAC 7512096201355881772 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 6138781,0762,0874,2832,4812,973 LAIA 11,19235,98644,25371,720138,532130,289161,267 MERCOSUR 342414,19917,82921,12843,55343,78253,663 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 5249258311,2522,9102,0882,945 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

5. 2016/1/45 Value of intra-trade as percentage of each group Trade Groups 19801990199520002005200820102011 CEMAC 66.540.330.328.733.934.149.844.9 COMESA 79.242.041.041.245.753.661.152.0 ECOWAS 73.577.174.474.666.968.154.760.4 SADC 52.685.884.580.780.679.575.978.8 CACM 37.233.031.224.525.226.824.723.2 CARICOM 7.821.022.215.221.022.018.819.2 LAIA 25.425.817.119.323.025.7 26.0 MERCOSUR 31.843.138.726.732.535.840.039.8 NAFTA 79.087.491.090.588.086.185.284.4 ASEAN 29.042.039.139.539.038.836.836.3 SAARC 14.913.313.915.614.213.112.211.8 EFTA 1.41.10.80.71.01.10.91.1 EU 86.091.292.491.090.389.489.688.9 Euro zone 70.671.869.968.967.366.867.666.8 APEC.. The current trend in world economy

6. 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

7. 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

8. 2016/1/48 The gravity-type equation of bilateral trade  Pöyhönen (1963), Linnemann (1966).  Typical type:  Frictionless type: The bilateral trade model

9. 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?

10. 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

11. 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

12. 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

13. 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

14. 2016/1/414 Economic size: Per capita GDP Bilateral export Bilateral import Economic similarity

15. 2016/1/415  Linder hypothesis  Intra-industry trade  Dispersion or similarity  Openness Related empirical topics

16. 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, 1986-2008 ; The WDI Indicators 2010. 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

17. 2016/1/417 Table 1 sim_gdpsim_popsim_ypcsim_x_xisim_m_mi sim_gdp1.0000 sim_pop0.30911.0000 sim_ypc0.24640.11071.0000 sim_x_xi0.44140.05990.16211.0000 sim_m_mi0.51980.08280.17970.29251.0000 Correlation matrix of economic similarity variables

18. 2016/1/418 Basic model ＋ REI dummies ＋ similarity Modified model ＋ REI dummies ＋ similarity Bilateral trade in East Asia (exercise) The empirical results

19. 2016/1/419 The estimation results Table 2 Pooled model － CS IIII I constant -1.939* (0.674) 2.871* (0.297) -6.011* (0.675) 0.240 (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 -0.298* (0.008) -0.272* (0.007) -0.018* (0.006) -0.017* (0.006) lnpopj -0.128* (0.008) -0.096* (0.007) -0.064* (0.006) -0.114* (0.006) lndistij -0.959* (0.014) -0.862* (0.014) -1.025* (0.015) -0.913* (0.014) -1.028* (0.015) -0.897* (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)

20. 2016/1/420 Table 2 Pooled model － CS IIII I EU -0.583* (0.056) -0.507* (0.055) -0.278* (0.056) -0.241* (0.055) -0.082 (0.057) -0.165* (0.055) EURO -0.153^ (0.089) -0.163^ (0.087) -0.138 (0.091) -0.150^ (0.088) -0.178* (0.092) -0.180* (0.090) NAFTA -0.410* (0.213) -0.145 (0.208) -0.358^ (0.217) -0.087 (0.211) 0.305 (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) -1.727* (0.467) 0.247 (0.483) -2.820* (0.470) -1.311* (0.494) -5.292* (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)

21. 2016/1/421 Table 3 FE2 (ij, t) FEM (i, j, t) IIII I I constant 32.34* (4.440) -33.68* (1.701) 45.42* (4.165) -23.15* (1.540) -19.55* (3.083) -41.48* (2.946) 4.267 (2.708) -27.05* (2.642) lngdpi 1.520* (0.053) 1.820 0.050) 11 1.743* (0.074) 1.889* (0.073) 1.678* (0.065) 1.819* (0.065) lngdpj 1.467* (0.052) 1.323* (0.051) 11 1.453* (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 0.032 (0.087) 0.243* (0.084) 0.029 (0.087) 0.214* (0.084) 0.432* (0.108) 0.648* (0.106) 0.559* (0.094) 0.739* (0.094) Lndistij -1.411* (0.014) -1.307* (0.014) Language 0.848* (0.026) 0.749* (0.026) Adjacency -0.341* (0.054) -0.241* (0.054)

22. 2016/1/422 Table 3 FE2 (ij, t) FEM (i, j, t) IIII I I eu_2 -0.196* (0.078) -0.048 (0.075) -0.290* (0.079) -0.160* (0.075) 1.093* (0.055) 0.996* (0.054) -0.593* (0.051) -0.540* (0.051) euro_2 -0.138* (0.069) -0.230* (0.066) -0.152* (0.069) -0.249* (0.066) -0.022 (0.087) -0.018 (0.085) -0.023 (0.076) -0.016 (0.076) nafta_2 0.309 (0.264) 0.238 (0.254) 0.238 (0.265) 0.154 (0.254) 2.501* (0.203) 1.807* (0.199) 1.101* (0.181) 0.512* (0.181) seafta_2 0.046 (0.139) 0.028 (0.133) 0.208 (0.139) 0.209 (0.133) 2.764* (0.173) 2.537* (0.170) 0.106* (0.153) 0.200 (0.154) sacu_2 0.268 (0.171) 0.486* (0.164) 0.156 (0.171) 0.343* (0.165) 5.043* (0.153) 4.785* (0.151) 2.132* (0.139) 2.198* (0.140)

23. 2016/1/423 Table 3 FE2 (ij, t) FEM (i, j, t) IIII I I sim_gdp -12.83* (0.802) -13.76* (0.770) -4.305* (0.179) -6.053* (0.157) sim_ypc 13.81* (1.419) 6.863* (1.367) 15.86* (1.413) 8.924* (1.367) 3.714* (0.517) -4.294* (0.506) -4.144* (0.457) -10.19* (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 5089150437508915043750891504375089150437 Parameters 2316231723142375130131133134 log-likelihood -86230.4-83384.9-86321.9-83543.9-106431.8-104584.2-99649.85-98989.7 Adj R-squared 0.86220.87230.67840.70130.70830.71700.77650.7733 Akaike Info. Crt. 177092.8167278.0177271.8167584.0213123.5209430.3199565.7198247.4 Bay. Info. Crt. 197560.3169520.4197721.7169773.4214272.4210586.9200741.1199430.4

24. 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) 1 1.740* (0.051) 1 1.820* (0.074) 1 lngdpj 1.106* (0.007) 1 1.320* (0.053) 1 1.383* (0.078) 1 lnpopi -0.329* (0.008) -0.047* (0.007) 0.316* (0.060) 0.430* (0.059) 0.265* (0.087) 0.396* (0.086) lnpopj -0.162* (0.009) -0.086* (0.007) 0.503* (0.073) 0.544* (0.073) 0.546* (0.106) 0.605* (0.106) eu_2 1.003* (0.054) 1.614* (0.054) -0.099 (0.078) -0.194* (0.078) 1.096* (0.054) 1.076* (0.054) euro_2 -0.162^ (0.096) -0.196* (0.099) -0.129^ (0.068) -0.140* (0.068) -0.014 (0.087) -0.026 (0.087) nafta_2 1.153* (0.224) 1.908* (0.231) 0.347 (0.263) 0.268 (0.263) 2.150* (0.203) 2.127* (0.203) seafta_2 4.460* (0.192) 4.097* (0.198) -0.002 (0.138) 0.161 (0.138) 2.788* (0.174) 2.924* (0.173) sacu_2 4.274* (0.167) 3.780* (0.172) 0.277^ (0.170) 0.151 (0.170) 5.077* (0.154) 5.026* (0.154)

25. 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) 1 1.740* (0.051) 1 1.820* (0.074) 1 lngdpj 1.106* (0.007) 1 1.320* (0.053) 1 1.383* (0.078) 1 lnpopi -0.329* (0.008) -0.047* (0.007) 0.316* (0.060) 0.430* (0.059) 0.265* (0.087) 0.396* (0.086) lnpopj -0.162* (0.009) -0.086* (0.007) 0.503* (0.073) 0.544* (0.073) 0.546* (0.106) 0.605* (0.106) eu_2 1.003* (0.054) 1.614* (0.054) -0.099 (0.078) -0.194* (0.078) 1.096* (0.054) 1.076* (0.054) euro_2 -0.162^ (0.096) -0.196* (0.099) -0.129^ (0.068) -0.140* (0.068) -0.014 (0.087) -0.026 (0.087) nafta_2 1.153* (0.224) 1.908* (0.231) 0.347 (0.263) 0.268 (0.263) 2.150* (0.203) 2.127* (0.203) seafta_2 4.460* (0.192) 4.097* (0.198) -0.002 (0.138) 0.161 (0.138) 2.788* (0.174) 2.924* (0.173) sacu_2 4.274* (0.167) 3.780* (0.172) 0.277^ (0.170) 0.151 (0.170) 5.077* (0.154) 5.026* (0.154)

26. 2016/1/426 The empirical exercise for research students

27. 2016/1/427 The empirical exercise (Model FCW (ij, t), I.) exporter importer CHNHKGIDOJPYKORMYSPHLSGPTHL CHN 2.570.212.282.781.401.683.001.14 HKG 1.501.301.902.271.593.283.011.05 IDO 0.913.071.461.512.243.023.650.55 JPY 1.221.90-0.323.260.661.201.09-0.18 KOR 1.712.27-0.273.260.791.331.240.07 MYS 1.402.661.541.731.862.483.690.89 PHL 1.684.342.312.272.402.483.561.08 SGP 1.933.071.881.091.242.622.501.14 THL 1.842.830.551.591.841.601.792.91

28. 2016/1/428 The empirical exercise (Model FCW (ij, t), II.) exporter importer CHNHKGIDOJPYKORMYSPHLSGPTHL CHN -0.46-2.450.642.20-0.210.675.960.46 HKG -1.194.730.151.301.099.436.670.91 IDO -2.235.59-2.54-2.38-0.167.347.41-1.97 JPY -0.090.15-3.404.40-1.83-0.15-2.41-2.97 KOR 1.481.30-3.244.40-1.430.27-1.94-2.18 MYS -0.211.82-0.29-1.10-0.703.175.06-2.31 PHL 0.6710.27.220.581.003.177.720.28 SGP 5.236.676.55-2.41-1.944.336.991.17 THL 0.591.76-1.97-2.11-1.33-2.180.412.02

29. 2016/1/429 The empirical exercise Model FCW (ij, t), I: using instrument variables. exporter importer CHNHKGIDOJPYKORMYSPHLSGPTHL CHN 0.33-1.520.250.67-0.180.061.37-0.72 HKG 0.130.04 0.360.112.061.50-0.67 IDO -1.580.45-1.44-1.40-0.600.740.94-2.21 JPY -0.210.04-1.851.20-0.69-0.23-0.66-1.73 KOR 0.210.36-1.801.20-0.58-0.11-0.53-1.52 MYS -0.180.57-0.55-0.23-0.120.751.45-1.10 PHL 0.062.520.790.230.350.751.85-0.77 SGP 0.911.500.54-0.66-0.531.001.39-0.60 THL -0.78-0.27-2.21-1.33-1.11-1.15-0.83-0.20

30. 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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32. 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, 61-95. Helpman, E., (1987) “Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries,” Journal of the Japanese and International Economies, 1, 1, 62-81. Hummels, D. and Levinsohn, J., (1995) “Monopolistic Competition and International Trade: Reconsidering the Evidence,” Quarterly Journal of Economics, 110, 3, 799-836. Mátyás, L., (1997) “Proper Econometric Specification of the Gravity Model,” The World Economy, 20, 363-368. References

33. 2016/1/433 Thank you very much.