Factors Affecting Textile Exports to OPEC Countries

Factors Affecting Textile Exports to OPEC Countries

Factors Affecting Textile Exports to OPEC Countries. There has been increasing interest in the relevance of international trade flows and the dynamics of such trade as it is influenced by geography, distance and varied aspects of culture such as common language, religion, or colonizers. Recent literature on the transmission channels of international trade has displayed interesting results with improvements in technology and declining transport costs affecting the classical gravity model. There is significant theoretical and empirical research on international trade patterns assessing the effects of different factors like distance, culture, and geography on the intensive and extensive margin. The wide array of literature available on international trade flows has assessed the effects of distance on trade, the dynamics of trade as influenced by the former colonizers, cultural distance, and effects of trade preferences in the gravity model.

In order to get a good background on the effects of the highlighted factors on international trade, empirical and theoretical literature will be assessed in this review. The main sources of the literature are Agostino, Aiello, & Cardamone (2008), on the issue of trade preferences and the effect on the gravity model of international trade. The literature on intensive and extensive margins and how they are influenced by the distance between countries will be assessed. The main sources for this are Cheong, Kwak, & Tang (2013); Chaney (2013); and Krautheim (2012). Another major part of the literature is the issue of cultural distance and the effect of colonizers on the amount and intensity of trade among different countries. Some of the main sources of literature in this area include Groot et al. (2004) and (Berthou & Ehrhart, 2013). Additional sources for the application of the gravity model will also be reviewed to indicate how it is used and the benefits it can offer in the analysis. The article by Anderson & Wincoop (2003) “Gravity with gravitas: A solution to the border puzzle” will form a good basis for the utilization and understanding of the gravity model.

Literature survey of the gravity approach to trade

The model

The gravity model focuses on the use of spatial interactions among variables through the general idea of gravity theory in physics. The theory and model were initially applied in different social sciences including sociology. Its first application in the econometrics domain was in the seminal paper by Tinbergen on international trade relations in 1962. However, the initial theoretical explanation of the gravity model, which was based on expenditure systems, was undertaken by Anderson (1979). Afterward, studies focused on improving the theoretical basis of the gravity model were undertaken such as Deardorff (1998). The success of the model in the econometrics and international trade areas was consistent with its applicability in several social science fields.

The gravity equations or models have been applied as a basic tool for assessing international trade for many years. These publications present some of the successful applications of the model I bilateral trade relations (Redding and Venables, 2004; Brun et al., 2002; Novy, 2013; and Liu and Xin, 2011). The gravity model indicates that the flow of trade between two points enlarges in direct ratio to the economic activity level or population between the different points and responds inversely to the geographical distance between the two points. Generally, the gravity models refer to bilateral trade flows based on country-specific characteristics of trade partners. The models analyze the effects of trade friction, such as geography, distance, free trade agreements, and preferential treatment (Jayasinghe and Sarker, 2008; Baier and Bergstrand, 2007; Okubo, 2004).

Examples

Antonucci and Manzocchi (2006) used an empirical study to assess the likely effect of Turkey's EU membership on trade using the gravity model. Gil– Pareja et al. (2008) analyzed the impacts of monetary agreement on trade flows. They used a sample of 25 countries from the OECD (Organization for Economic Co- Operation and Development). The study findings from the OECD countries showed that all monetary agreements considered had statistically significant and economically relevant roles in influencing international trade. Egger and Larch (2011) estimated a positive impact from Interim and European Union Agreements in relation to bilateral trade in a sample of 167 countries. In line with the postulations of the gravity model, Egger and Larch (2011) found an economically and statistically significant impact of currency unions on bilateral trade. Their findings indicated a high relevance of currency unions indicating that bilateral trade approximately doubled / halved s as two countries formed or dissolved a currency union.

The use of a certain transformation of the gravity model to deduce the impact of trade costs. Jacks and colleagues (2011) used the gravity model to find a unifying framework to accommodate a variety of motivations and explanations for international trade. They explored the long-run evolution of transaction and transport costs related to the exchange of goods across national borders. In this case, instead of estimating trade costs, they derived it from the gravity equation. In a study by Olper and Raimondi (2008), they explored market access reciprocity in food trade across Canada, the US, Japan, and the European Union using a bilateral trade equation. They estimated the border effect of trade form a theory- consistent gravity model. The study by Olper and Raimondi (2008) explored whether and to what extent market access asymmetry effectively resulted from the existence of asymmetric trade policies such as quotas and protection of domestic industries.

Variables

Some of the main variables used in the gravity model include the accumulation rates for factors of production such as human capital, physical capital, and labor. The models also incorporate other variables that influence international trade such as distance or transport costs. Other costs associated with international trade have to be incorporated in the model such as transaction expenses. Egger and colleagues (2011) analyzed the indirect effect of quotas through the general equilibrium response. Egger and others evaluated and quantified the role of preferential trade agreements on trade flows using the Poisson pseudo- maximum-likelihood evaluation with endogenous binary indicator variables. The proposed model decomposes the impact on trade volumes for all trade resistance measures into the intensive and extensive margin components using country- level data. The approach was found to be especially important since a considerable proportion of trade modification occurs at the extensive margin, and it may not be possible to gain consistent firm-level information with export destinations for many countries.

Criticism of the model has been provided by some scholars. Anderson and VanWincoop (2003) argued that the estimated gravity equations do not have sufficient theoretical foundations. The estimation is inefficient because of omission of variables, which prevent comparative statistics although they are generally the purpose of the gravity equation estimations. The traditional gravity equation suffers from incorrect specification because it does not account for multilateral resistance terms. They found that borders reduced bilateral trade levels. In this aspect, variables relating to cross-border trade restrictions such as culture and political similarity are used t highlight how smooth flow of goods and services may differ for countries. In order to solve the issue, they proposed the augmentation of the traditional gravity equation with importer and exporter fixed effect.

Novy (2013) uses a micro-founded gravity model based on trans-log d system that allows for flexible substitution patterns across goods. Since trans-log gravity generates an endogenous trade-cost elasticity, the level of trade is more responsive to trade cost if the source country provides only a small proportion of the imports to the destination country.

Most empirical studies on the gravity model over the past decade have applied a cross-section methodology. Instead of employing data averages over a period of time, a panel framework is more efficient in capturing the relations among the different variables over longer periods. With panel data, it is possible to assess country-specific effects and interpret the elasticities (Egger, 2000). When the gravity equations are based on panel data, it is essential to determine whether a random effect model (REM) or a fixed effect model (FEM) should be utilized. In the current research, we analyze trade relationships between Turkey and certain EU countries, REM assumptions do not hold in this setting. As a result, the relevant choice is FEM, which has been applied in related papers such as Egger (2000); and Antonucci and Manzocchi (2006).

Literature on intra-regional trade in OIC countries 

The gravity model was applied in international trade for the first time by Tinbergen in 1962 and later Poyhonen in 1963. They used the model to analyze patterns of bilateral trade among European countries. The origin of the gravity model as it was applied in the field and subfields of social science dates as far back as the 1930’s for different fields such as Sociology, and Economics. Ghani (2007) assessed the effects of membership in the Organization Islamic Conference (OIC) on volume of trade among the members. Using the standard gravity model, Ghani discovered that OIC members were more susceptible to civil conflict, and the quality of their institutions was on average, reasonably low compared to non-OIC members. Raimondi & Olper, 2011) investigated the likelihood of faith-based integration for countries in the OIC. The study and its findings were seen as a strong case for enhancement of intra-OIC trade.

Another study by Bendjilali (1997) examined the major determinants of the intra-OIC trade relations using the gravity model. The study showed that trade was positively correlated with the size of the economy and inverse to the cost of transportation as a substitute for distance. Intra-Arab trade and trade between the Arab countries and the rest of the international community have been found to be lower than the levels predicted by the gravity model (Al Atrash and Yousef, 2000). The results of the Al Atrash and Yousef (2000) study suggested that significant scope of regional integration. The volume of intra-regional commerce is very low because the countries in the OIC were highly dependent on the industrialized nations. As a result, the removal of tariffs and non-tariff barriers for the OIC countries can lead to a highly profitable intra-regional trade. It is critical to make the preferential trade agreement more effective among OIC members by enhancing private sector participation as opposed to special treatment for the members. In order to improve the benefits, OIC member countries were advised to strengthen their backward and forward relations in investment and production to gain economies of scale.

The structure of trade among Muslim countries was assessed by Khalifah (1993. The study by Khalifa showed that the trade effect of the high-income countries was greater than that of the upper and lower-middle-income countries. Khalifa argued that trade integration involving the Muslim countries had to incorporate states in the Middle East. Khalifa highlighted that there were significant political complexities in the region and uniting them was not an easy task. In a study by Ab Rahman and Abu-Hussin (2009), Malaysia’s trade relation with countries in the Gulf Cooperation Council (GCC) was assessed. The GCC consist of countries such as the United Arab Emirates (UAE), Saudi Arabia, Bahrain, Qatar, Oman, and Kuwait. Using the trade intensity index, Ab Rahman, and Abu-Hussin discovered that Malaysia’s international trade with individual GCC countries and with the GCC as a regional market were very low in 1990 –2007. The study resulted in recommendations on how to enhance Malaysia-GCC trade relations. The recommendations included expediting the Free Trade Agreement (FTA) and focusing on niche product areas where the different countries have comparative advantages such as tourism, Halal Food services, Islamic Banking and Finance services, construction, Bio-fuel industries, education, and petrochemical industries. A further study on the Malaysia-GCC trade showed that based on the Gravity Model estimation, religion and culture were insignificant factors in influencing bilateral trade (Evelyn et al., 2011).

Ismail (2008) assessed the patterns of bilateral trade between Malaysia and eighty of its trading partners, where twenty were OIC members. In the research, Ismail found that Malaysia mostly trade with countries that were similar to it in terms of size but had varied factor endowments. Other studies like Abu-Hussin (2010) have explored trade relations between Malaysia and the GCC. Using the revealed comparative advantage as well as the trade intensity index, Abu Hussin found that the trade linkages between GCC are insignificant in relation to Malaysia’s traditional trade partners.

Exports and economic growth

There has been an expansion of services trade internationally. The growing relevance of services in the economy has been noticed, but international trade literature has not addressed it comprehensively. Instead, the literature on international trade has focused for a long time on relations between commodities trade and economic growth, without achieving any empirical consensus. It is reasonable to posit that some services, like goods, possess growth-generating traits. The fundamental function of many services in relation to the overall economic growth is their enhancement of the value of manufactured goods and coordination of the global value chains. In this way, service trade barriers may spill over to other aspects of the economy affecting the competitiveness of the whole supply chain. In this way, service trade restrictions have to be addressed by services trade negotiators. A new line of empirical evidence indicates that countries with more open services markets are more likely to have higher competitiveness in manufacturing (Deardorff, 1998)

A casual review of the relationship between exports and GDP would lead one to infer that the correlation between the two is positive. Intuitively, since exports are a component of GDP, increasing exports necessarily increases GDP, ceteris paribus. However, in addition, there are potential positive externalities created by exporting. An emphasis on exports, in addition to increasing GDP directly, may also lead to positive externalities in the non-export sector in the form of knowledge spillovers, such as more efficient management and production techniques (Grossman and Helpman, 1991; Novy, 2013). This, in turn, may lead to innovation and production expansion in the export and non-export sector, consequently raising incomes and propelling growth. Exports also provide the foreign exchange needed to purchase imports, which may provide further beneficial effects on economic growth (Egger & Larch, 2011). Significant positive externalities accrue to the exporting country as a result of competition in international markets, including increasing returns to scale, learning spillovers, increased innovation, and other efficiency gains, all of which can increase the rate of economic growth.

While many studies show that increasing exports is positively related to economic growth, there are fewer consensuses on the exact nature of this relationship. For example, Michaely (1977) and Tyler (1981) examine a large sample of developing countries, which they divide into least developed and most developed. They each find a positive relationship between export growth and economic growth for the most developed countries, but not for those which are least developed. Michael argues this is evidence that countries need to reach a threshold level of development before they can fully reap the benefits from increasing exports. However, these studies are limited in that they arbitrarily define development and the corresponding threshold. Foster (2006) addresses this concern by allowing the data to endogenously split the sample, using the technique of Hansen (2000), but finds no evidence that a country needs to be relatively developed before it can benefit from increasing its exports. However, Foster (2006) only analyzes aggregate exports in a sample of African countries. In contrast, the current study includes a wider variety of countries and considers the impact of disaggregated exports in addition to total exports. The extant literature clearly shows that exports can play an important role in economic growth. However, many empirical studies only consider the growth of total exports. The few studies that investigate disaggregated exports do not consider that a country may need to meet some endogenous development threshold before it can benefit from exporting manufactured goods. Furthermore, it is possible that the level of exports is more relevant than export growth for capturing the positive externality effects. I explore this possibility in the next section.