“Trade Structure, Industrial Structure, and International Business Cycles”

Marianne Baxter and Michael A. Kouparitsas
IED Discussion Paper 127, January 2003

A recent debate in the field of international trade is on the linkage between patterns in international trade and the transmission of business cycles across countries. In theory, one would expect two countries that are linked through international trade to experience similar business cycle fluctuations. This issue concerns policymakers as much as economists as the findings will shape trade arrangements between countries. Surprisingly, no strong empirical evidence pointing in this direction has been documented so far.

Baxter and Kouparitsas approach this question from a micro perspective where they examine the determinants of a country’s production and trade structure. By looking at a dataset covering 164 countries they construct several indices which measure the dispersion of a country’s production and trade compared to the rest

of the world. This allows the authors to compare the compositions of a country’s production and trade with those of its trading partners. The dataset includes information on manufacturing as well as non-manufacturing goods, enabling the authors to distinguish between industrial and developing countries.

Baxter and Kouparitsas find that developing countries feature higher dispersion patterns in production and trade. The results suggest no clear link between trade dispersion and product dispersion vis-à-vis trading partners. The authors also investigate the possibility of factor endowments playing a role in the dispersion of export and import bundles and find weak evidence that differences in educational endowment across countries lead to trade dispersion.

Baxter and Kouparitsas mention two strands of research for which their findings may be important. First, these findings will serve as important reference for researchers analyzing patterns of international trade. Second, they will help open the way for a new line of research that investigates the link between trade partnerships and the international transmission of business cycles.