Drivers of Global Trade: A Product-Level Investigation
One sentence summary: Supply-side factors, capturing production and exporting costs in source countries, are responsible for about 85% of changes in global trade between 1995 and 2018.
The corresponding academic paper by Hakan Yilmazkuday has been accepted for publication at International Economic Journal.
Working paper version is available here.
Abstract
This paper investigates the drivers of global trade at the six-digit product level by using the implications of a model that are consistent with a large class of trade models. The drivers of global trade at the product level are identified first by estimating the product-level bilateral trade implications of the model and second by aggregating the fitted estimation results across bilateral countries using Taylor series. The empirical results suggest that supply-side effects (capturing production or exporting costs in source countries) contribute to changes in global trade more than six times the demand-side effects (capturing economic activity or preferences in destination countries) and more than ten times the effects of bilateral trade costs (capturing bilateral protectionism measures). Several product-level implications follow.
Non-technical Summary
Global merchandise trade has increased by more than 6 trillion U.S. dollars between 1995-2018. This increase is mostly accounted for by products such as machinery/electrical (with a contribution of about 26%), mineral products (with a contribution of about 18%), chemicals and allied industries (with a contribution of about 11%), and transportation (with a contribution of about 11%). Across broad economic categories, trade of intermediate inputs account for about 66% of this increase, whereas trade of capital goods and intermediate inputs account for about 18% and 16%, respectively. Although these statistics provide useful information on products or categories that drive the global trade, policy making requires knowledge on the economic forces that are responsible for the contribution of these products or categories.
This paper investigates the economic drivers of global trade by using six-digit product level data covering the years 1995-2018. These economic drivers are identified by using the implications of a large class of trade models, where bilateral trade between any two countries depend on source prices, bilateral trade iceberg costs, and a measure of economic activity at the destination country. Based on this motivation, a simple trade model is introduced of which implications are used for decomposing the changes in global trade into those due to supply-side factors (capturing source prices and thus production or exporting costs in source countries), demand-side factors (capturing economic activity or preferences in destination countries), and bilateral trade costs (capturing bilateral protectionism measures).
The knowledge of the decomposition of changes in global trade is important especially countries focusing on export-led growth, because if supply-side factors are effective in explaining changes in global trade, source countries may want to invest more into their production technologies, infrastructure, financial depth, operational costs of exporting, costs related to entering foreign markets, or modifying their products for individual foreign markets. In contrast, if demand-side factors are effective, source countries may want to invest in removing information barriers (e.g., through advertising their products) to affect preferences of destination countries. Finally, if bilateral trade costs are effective, source countries may want to get involved in negotiations to reduce trade barriers (e.g., through free trade agreements).
Regarding the methodology, the decomposition of changes in global trade is achieved first by estimating the product-level bilateral trade implications of a trade model and second by aggregating the fitted estimation results across bilateral countries using Taylor series to obtain global product-level measures. This methodology results in identifying the contribution of supply-side factors, demand-side factors and bilateral trade costs to changes in product-level global trade between 1995 and 2018. The corresponding results suggest that supply-side effects have contributed to changes in global trade by about 85%, followed by demand-side effects with a contribution of about 13% and by bilateral trade costs with a contribution of about 8%. The corresponding contribution of residuals by only about -6% capturing unexplained part of the data by the model implications or approximation due to using Taylor series further supports the investigation.
This paper investigates the economic drivers of global trade by using six-digit product level data covering the years 1995-2018. These economic drivers are identified by using the implications of a large class of trade models, where bilateral trade between any two countries depend on source prices, bilateral trade iceberg costs, and a measure of economic activity at the destination country. Based on this motivation, a simple trade model is introduced of which implications are used for decomposing the changes in global trade into those due to supply-side factors (capturing source prices and thus production or exporting costs in source countries), demand-side factors (capturing economic activity or preferences in destination countries), and bilateral trade costs (capturing bilateral protectionism measures).
The knowledge of the decomposition of changes in global trade is important especially countries focusing on export-led growth, because if supply-side factors are effective in explaining changes in global trade, source countries may want to invest more into their production technologies, infrastructure, financial depth, operational costs of exporting, costs related to entering foreign markets, or modifying their products for individual foreign markets. In contrast, if demand-side factors are effective, source countries may want to invest in removing information barriers (e.g., through advertising their products) to affect preferences of destination countries. Finally, if bilateral trade costs are effective, source countries may want to get involved in negotiations to reduce trade barriers (e.g., through free trade agreements).
Regarding the methodology, the decomposition of changes in global trade is achieved first by estimating the product-level bilateral trade implications of a trade model and second by aggregating the fitted estimation results across bilateral countries using Taylor series to obtain global product-level measures. This methodology results in identifying the contribution of supply-side factors, demand-side factors and bilateral trade costs to changes in product-level global trade between 1995 and 2018. The corresponding results suggest that supply-side effects have contributed to changes in global trade by about 85%, followed by demand-side effects with a contribution of about 13% and by bilateral trade costs with a contribution of about 8%. The corresponding contribution of residuals by only about -6% capturing unexplained part of the data by the model implications or approximation due to using Taylor series further supports the investigation.
Across products, supply-side effects explain cumulative changes in product-level global trade between 47% (for Textiles) and 97% (for Chemicals & Allied Industries). In comparison, demand-side effects explain cumulative changes in product-level global trade between 3% (for Stone/Glass) and 45% (for Animal & Animal Products). Finally, bilateral trade costs contribute to product-level global trade between 3% (for Chemicals & Allied Industries or Wood & Wood Products) and 24% (for Textiles). Across broad economic categories, supply-side factors contribute to global trade between 62% (for consumption goods) and 89% (for intermediate goods), demand-side factors contribute to global trade between 8% (for intermediate goods) and 29% (for consumption goods), and bilateral trade costs contribute to global trade between 7% (for intermediate goods) and 13% (for consumption goods).
Since supply-side factors are shown to be the main drivers of global trade, it is implied that rather than purely focusing on reducing bilateral trade costs through trade negotiations, one additional way for source countries to increase their exports is to reduce their production costs, say, by investing more into technology, infrastructure, or financial depth, while another way is to reduce their export-related costs such as operational costs of exporting, costs related to entering foreign markets or modifying their products for individual foreign markets.
The corresponding academic paper by Hakan Yilmazkuday has been accepted for publication at International Economic Journal.
Working paper version is available here.