Pecking Order and Core-Peripery in International Trade

This paper analyzes the impact of market size and trade costs on bilateral trade flows. A multi-country trade model with firm-level heterogeneity in productivities and countries’ market potential provides a simple micro foundation for the link between these variables. In the model, market size and trade costs jointly determine a country-specific pecking order of exporters serving their destination countries. In a counterfactual setting where bilateral trade costs are homogeneous across country pairs, market size predicts a common ranking of exporters among destination countries. This leads to a unique core-periphery structure of the world trade network. With heterogeneous trade costs, we illustrate the impact of market size and trade costs on bilateral trade flows and its margins in a simple gravity-like setting. Using an instrumental variables approach, we find that both market size and trade costs (measured through the network position of countries) have a significant impact on bilateral exports: countries in the core bilaterally trade more with other countries in the core than with peripheral countries, conditional on typical observables.

Publication year:2020

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BOF-publication weight:0.1

CSS-citation score:1

Authors from:Private, Higher Education

Accessibility:Open