Tracing the role of sources of comparative advantage in bilateral trade flows: The case 8 of ASEAN-5 and the US

• Main Authors: Cuartero, Rene D., Sulit, Marie Johanna, To, Belinda Elois
• Format: text
• Published: Animo Repository 2019
• Subjects: International trade; International Business
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/9467
• Institution: De La Salle University

Traditional trade theory conventionally shows that comparative advantage (CA) explains a country’s choice to specialize in the production of a good based on lower opportunity cost. Building on the frameworks of Chor (2010) and Eaton and Kortum (2002), we empirically test if physical distance, factor endowments and institutional quality –all sources of CA –influence bilateral trade flows. Our study covered country-and industrylevel data for the nine ASEAN Priority Sectors from 2003 to 2008. We employed panel regression with special considerations for fixed-effect dummies to account for trade pattern evolution across years. Our findings reveal that factor endowments have shown a small role in explaining trade patterns. Increasing trade costs and institutional CA are also significant in affecting bilateral trade. Interaction of country- and industry-level institutional CA that significantly affect trade patterns positively are: (i) financial development, (ii) legal systems that address contract enforcement issues and holdup problems, and (iii) flexible labor institutions addressing volatile industries. On the other hand, we find decreasing trade due to inefficiencies in institutional sources of CA in: (i) legal systems that address competition, and (ii) investments in human capital to address complex industries.