Vertical intra-industry trade, technology and income distribution: A panel data analysis of EU trade with Central-East European countries

H. Gabrisch
2009 Acta Oeconomica  
This paper tests a neo-Heckscher-Ohlin framework versus a neo-Ricardian framework for explaining vertical intraindustry trade. The study applies panel techniques with instrument variables to analyse trade between 'old' EU and 10 Central-East European countries in their post-transition period. Results show country-pair fixed effects to be of high relevance for explaining vertical intra-industry trade. Technology differences are positively, while differences in factor endowment measured in GDP
more » ... measured in GDP per capita, are negatively correlated with vertical intra-industry trade, and confirm the relevance of the neo-Ricardian approach. In addition, changing bilateral differences in personal income distribution during the transition of Central-East European countries towards a market economy contribute to changes in vertical intra-industry trade. 2 I TRODUCTIO This paper asks why product differentiation is predominant between high and low quality varieties of the same goods in trade between the 'old' EU-15 and ten Central-East European countries (CEEC-10) 1 . Although this study does not explicitly discuss policy issues, its results may implicitly add to political considerations. For example, intra-industry trade is commonly related to the 'smooth labour market adjustment hypothesis', which states that workers of a given industry may find a job more easily at another company of the same industry when international competition is within and not between industries. However, vertical intra-industry trade challenges this hypothesis, for the technologies and skills that produce similar goods differ may not suffice to find a job at another firm producing a similar kind of goods, but with different technology. Another example is personal income distribution. In intra-industry trade models inequality in personal income distribution is disregarded; but in vertical trade models income distribution plays a leading explanatory role as an explanatory argument, thus policy with its distributional effects comes into play. Trade relations between the two groups of countries -the CEECs being former socialist countries − are characterised by fast track of regional integration and short geographical distances, which is in contrast with trade relations dealt with in most other empirical studies. However, intra-industry trade relations between the two groups of countries have been given relatively little attention by trade economists. In the 1990s, a considerable number of works concentrated on the measurement of changes in the trade structures (at least due to a flawed data base, which might have biased testing models. The first analytical papers emerged in the second half of the 1990s, with an industry-specific approach (Djankov and Hoekman 1996 , Thom and McDowell 1998 , Aturupane et al. 1999 , Ando and Kimura 2005 . In classical trade economics country-specific determinants matter, to which firms adjust. Industry-specific approaches stem from attempts of the 'new trade theory' to expand the classical trade theory by, for example, product differentiation behaviour of firms on the background of firm-or industry-specific determinants like fragmentation of production chains, or related foreign direct investment. Empirical literature has found more support for country rather than industry determinants. And even, when cross-border production sharing explains the strong increase in vertical intra-industry Table A1 Table A2
doi:10.1556/aoecon.59.2009.1.1 fatcat:fh7eopsvabd3vombghpbo3aude