Grigori Fainstein, Ph.D., Economics, Tallinn University of Technology, Kopli 101, Tallinn, 11712, Estonia
In this paper, we investigated the development of Estonian foreign trade flows. The objective was to analyse the nature and aspects of structural changes that occurred in trade in 1995 – 2006 and to determine the factors behind these changes including comparative advantage and intra-industry trade. Understanding the main factors behind the structural development of Estonian trade is an important condition for effective macroeconomic policy, foreign trade and industrial policy. We based our work on statistical and econometric analysis of the data available on trade flows.
Estonian trade policy is extremely liberal, so a development of foreign trade since the trade liberalization was more rapid than GDP growth (especially in the beginning of the transition process). The structure of foreign trade compared to both the structure of domestic demand and that of industrial manufacturing also changed more rapidly. It can be explained by greater dependence on the demand of trade partners and by remarkable share of re-exports that are more vulnerable to the economic shocks.
After the structural analysis, the focus turned to the revealed comparative advantage (RCA). We calculated indicators of revealed comparative advantage in Estonian trade and investigated the similarity of Estonian structure of revealed comparative advantage with it main trading partners. This was followed by an analysis of the factor intensity of Estonian trade flows where we used approach developed in UNCTAD. The general tendency is the decrease of labour-intensive and resource based commodities share and increase in the share of manufacturing with low and medium skill and technology intensity. The share of high skill and technology goods are still low.
In the next step of analysis we investigated the intra-industry trade and its horizontal and vertical components. Vertical intra-industry trade was the most interesting for us because it is positively correlated with economies of scale and inflows of FDI. According to literature we included in vertical intra-industry trade commodity groups where the difference between unit export prices and unit import prices exceeded 15%.
The objective of the followed econometric analysis was to study the impact of a comparative advantage and intra-industry trade level of commodity groups on their export share. The panel-data fixed-effect model was specified at HS 2-digit level for years 1994 – 2006. An estimation result suggested that both factors significantly determined the share of export in respective commodity group.