Explaining trade flows and determinants of bilaterial trade

This thesis provides the empirical analyses for international trade flows and the determinants of bilateral trade. The main modelling framework used in this thesis is gravity model, so firstly, a detailed literature review for the gravity trade model is given. The three empirical studies analyze the role of main determinants of international trade flows in details, including cultural similarities, geographical factors and trade costs. Our findings are summarized as follows. First, the gravity model works well with aggregate data as well as disaggregated data. The core gravity factors and the cultural similarities are the major determinants of China’s bilateral trade. Moreover, China has great export potential with its neighbour countries in Asia, and considerable import potential with most of its trade partners. On the other hand, China’s export potential is still in the labour and resource intensive, low- and middle-level skill-intensive product groups. Second, we combine log-linear and non-linear estimation techniques, including Tobit estimation to analyze the role of geographical distance on trade. The findings indicate that the absolute value of the distance coefficient decreases over time, which give a reasonable explanation for “missing globalization puzzle”. Finally, by estimating a modified gravity equation of panel data for China, Japan and Korea over 16 years, we find that transport costs have a significant influence on regional trade flows in Northeast Asia.