This presentation is part of: F01-1 Globalization and Competition

In International Trade Apples Do Fall Far from the Tree

Yener Kandogan, Ph.D, University of Michigan-Flint, 303 E. Kearsley, Flint, MI 48430

OBJECTIVES
Horizontal intra-industry trade, where countries export and import in overlapping industries, has been on the rise in bilateral trade of rich countries. A more interesting phenomenon is the large overlap between poor and rich countries at product level. These might be considered contradictory to the Heckscher-Ohlin framework, but examination of unit values within product classifications has shown that different products are exported by rich countries than by poor countries. Schott (2001) provides evidence for this by examining highly disaggregated US trade data.
This paper provides supporting evidence for this relationship by examining the bilateral trade data from all countries at an aggregated level. The paper also points out to other significant relationships between the export as well as the import unit values, their means and standard deviations, and income of the importer/exporter countries and the changes observed in these over time. 
DATA AND METHODSAnalysis in this paper is limited to four products. These are women’s knitted and woven fabric blouses, and men’s knitted and woven cotton shirts. These products are chosen since quality in clothing varies significantly. Trade data on volume, weight and quantity is obtained from UN COMTRADE database over the period of 1990 to 2005. A regression model is used to examine the extent of the correlation of average unit value of exports or imports with the per capita GDP of the importer, that of the exporter and time. Following Feenstra’s (2002), the fixed effects for the importer and the exporter, are included in the model to control country-specific heterogeneity. A similar regression model is adopted to analyze how this variance is affected by the per capita income of the importer country:RESULTSPositive significant relationship between export unit value and income of the exporter country is present not only in the US trade flow data, but also in data from other countries. Furthermore, this relationship is found to be significant even at aggregated product levels. The paper also finds a positive significant relationship of import unit values with the income of the importer country. As Schott (2001) reported, consistent with the product cycle theory the average unit value premia is increasing over time as rich countries reduce competition with poorer countries by increasing the quality of their products. However, this paper shows that the positive relationship disappears once both the exporter and importer country incomes are controlled.Variations in standard deviations in unit values are also examined. The paper shows that the standard deviation in export unit values significantly increases with the exporter country income and time. Similar positive significant relationship is found between respective variables for importers.

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