ECON 121: International Trade Theory
Lecture 2: Structure of World Trade
Pablo Fajgelbaum
UCLA
September 30, 2024
This Lecture
Basic facts about the structure of world trade
▶ What determines trade volumes?
⋆ Importance of country size, distance, and borders
▶ What products get traded?
Sources
▶ Krugman et al., ch. 2
▶ Ortiz-Ospina, Beltekian and Roser, Trade and Globalization
▶ Irwin book, ch. 1
Determinants of Bilateral Trade Flows
Who are the major trade partners of the U.S.?
Major U.S. Trade Partners, 2019
75% of US trade (=imports+exports) is accounted by its top 15 trade
partners:
Source: Krugman et al.
What are the Determinants of U.S. Trade Partners?
Across top U.S. trade partners we see some key determinants of trade
volumes:
Economic Size (Germany, U.K., France)
Trade Barriers (e.g., Canada, Mexico)
▶ Physical (distance)
▶ Policy (free trade agreement)
Other factors (e.g., UK, Canada)
▶ Cultural affinity, Language
Biggest Traders are also the Biggest Economies
Data from 2019. Source: WITS
Economic Size Matters for Trade
Source: Krugman et al.
Distance Matters for Trade
Source: Krugman et al.
The Gravity Model
The roles of economic size and distance for trade are captured by the gravity
model of trade.
Gravity model of trade:
Tij = A ∗ Yia ∗ Yjb /Dijc
▶ Tij is the value of exports from i to j
▶ Yi is aggregate income at i
▶ Yj is aggregate income at j
▶ Dij is distance
▶ A, a, b and c are constants chosen to fit the actual data
Why “gravity” model? Analogy to Newton’s law: gravitational attraction is:
▶ proportional to the product of the masses (economic sizes)
▶ and inversely proportional to the square of distance
The Gravity Model
Taking the log: ln Tij = ln A + a ln Yi + b ln Yj − c ln Dij
Bilateral Trade and Distance, 1950
Taking the log and residualizing: ln Tij − a ln Yi − b ln Yj = ln A − c ln Dij
The red line shows the average relationship between log-trade and log-distance
Bilateral Trade and Distance, 2006
Taking the log and residualizing: ln Tij − a ln Yi − b ln Yj = ln A − c ln Dij
The red line shows the average relationship between log-trade and log-distance
Bilateral Trade and Distance, 2006 (1950 Pairs)
Taking the log and residualizing: ln Tij − a ln Yi − b ln Yj = ln A − c ln Dij
The Gravity Model
Surprisingly, the role of distance did not diminish
I.e., the coefficient c is approximately constant over time:
ln Tij = ln A + a ln Yi + b ln Yj − c ln Dij
And it is usually in empirical estimates close to 1
▶ I.e.: a 1 percent increase in distance is associated with about 1 percent
reduction in trade
Borders Matter for Trade
Source: Krugman et al.
Cultural Factors Matter for Trade
Source: Head and Mayer: “Gravity Equations: Workhorse, toolkit, and cookbook”, Handbook
of International Economics.
Typical Estimates of Gravity Equations
Source: Head and Mayer: “Gravity Equations: Workhorse, toolkit, and cookbook”, Handbook
of International Economics
What Products are Traded?
What Does the World Trade?
Share of Food in Exports
Source: Ortiz-Ospina, Beltekian and Roser
Rise of Service Trade
Source: IMF
Service Exports by Sector
Source: IMF
What Does the World Trade? (HS2)
Source: MIT OEC
What Does the World Trade? (HS4)
Source: MIT OEC
Countries Whose Biggest HS4 Export is a Mineral Product
Refined Petroleum: India, US; Crude Petroleum: Angola, Canada, Chad, Russia; Iron
Ore: Australia, Brazil; Copper Ore: Peru, Chile
Countries Whose Biggest HS4 Export is a Precious Metal
Gold: Bolivia, Mali, Tanzania, Sudan, Zimbabwe; Diamonds: Namibia, Botswana;
Platinum: South Africa
Countries Whose Biggest HS4 is a Transportation Product
Cars: Mexico, Spain, Portugal, Germany, Turkey, Japan; Spacecraft: France
Two Types of Trade Flows
Inter-industry trade:
▶ some countries do a lot of imports and others do a lot of exports in a
sector
▶ between relatively “dissimilar” countries (in terms of income per capita)
▶ lower-income countries are net exporters in primary sectors
▶ higher-income countries are net exporters of manufacturing sectors
▶ driven by factor endowments and resource abundance
Intra-industry trade:
▶ countries do a lot of imports and exports in the same sector
▶ between relatively “similar” countries (in terms of income per capita)
▶ within manufacturing sectors
▶ happens more often among higher-income countries
▶ driven by accumulation of specialized knowledge and supply chains
Exports from US, 2019 (HS4)
Source: MIT OEC
Exports from ??, 2019 (HS4)
Source: MIT OEC
Exports from Venezuela, 2019 (HS4)
Source: MIT OEC
Exports between US and Venezuela, 2019 (HS4)
From Venezuela to US ($1.8b): From US to Venezuela ($1.2b):
Source: MIT OEC
Exports between US and Korea, 2019 (HS4)
From Korea to US ($75b): From US to Korea ($57b):
Source: MIT OEC
Two Types of Trade
The case of U.S., Venezuela, and Korea highlights the two different
types of trade
▶ Inter-industry trade (between U.S. and Venezuela)
▶ Intra-industry trade (between U.S. and Korea)
Importance of intra-industry trade
A simple measure of intra-industry trade:
min {imports, exports}
IIT =
0.5 x (imports + exports)
▶ IIT index is 1 if ( imports = exports ) and 0 if trade is one-way
Variation in this IIT index for US sectors, 2009
E.g., US trade with Mexico is Largely Intra-Industry (HS2)
Intra-Industry Trade within Narrow Goods, e.g. Golf Clubs
Product-Level Specialization
By construction, the deeper the trade classification (e.g., HS6 and
finer), the more likely it is to see one-way trade
Some products may be concentrated in few countries
E.g., consider export concentration in products to fight Covid-19
Product-Level Specialization in Covid-19 Products
Source: Evenett (2020)
Product-Level Specialization in Covid-19 Products
Source: Evenett (2020)
Map of World Trade
About 50% of world trade is “North-North”, largely intra-industry
About 15% is “South-South”
Summing Up
1 Determinants of trade between countries
▶ Economic size
▶ Distance, barriers, and borders
▶ Other forces (e.g., common language)
▶ Specialization patterns
2 What goods do countries trade?
▶ Inter-industry vs. intra-industry trade
