A contribution to a multidimensional analysis of trade competition

• Author: Nuno Crespo,Sandrina Moreira,Nadia Simoes
• Published date: 01 October 2017
• Date: 01 October 2017
• DOI: http://doi.org/10.1111/twec.12492

ORIGINAL ARTICLE

A contribution to a multidimensional analysis of

trade competition

Sandrina Moreira

1

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Nadia Simoes

2

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Nuno Crespo

2

1

Department of Economics and Management, Set

ubal, Portugal and BRU –IUL (Business Research Unit), Instituto

Polit

ecnico de Set

ubal (ESCE –IPS), Lisboa, Portugal

2

ISCTE Business School Economics Department, BRU - IUL (Business Research Unit), Instituto Universit

ario de

Lisboa (ISCTE –IUL), Lisboa, Portugal

1

|

INTRODUCTION

Economic globalisation and the emergence of new poles in the world economy are among the

most critical trends of (at least) the last three decades (Head & Mayer, 2013; Riad et al., 2012).

As described by Kaplinsky and Messner (2008, p. 197), “the global economy is undergoing a pro-

found and momentous shift.”This geographical reconfiguration of international economic relations

was driven by technological progress and the reduction of trade costs generated by the evolution

in the transport sector and the liberalisation trend that characterised the world economy in the sec-

ond half of the twentieth century (Carter & Li, 2004). As a consequence of these transformations,

international trade grew dramatically during the last decades and we are faced with a new scenario

characterised by much more open and interdependent economies (Berthelon & Freund, 2008).

Given the magnitude of actual trade flows and their importance for the overall economic perfor-

mance of the countries (and the firms), the phenomenon of trade competition requires special atten-

tion and needs to be seen as a priority in the agenda of international trade research.

More specifically, particular emphasis should be directed to the development of new ways to

evaluate the phenomenon, providing not only a detailed view of the actual situation but also some

insights on critical dynamic elements, capturing the main trends and highlighting the challenges

that they raise. Some efforts are already in place aiming the analysis of the threat imposed by the

emergence of new important players in the international trade arena. A major example is of course

the case of China (Kaplinsky & Messner, 2008), with several studies analysing the impact of the

Chinese trade growth for other countries in several destination markets (e.g., Bl

azquez-Lidoy,

Rodr

ıguez, & Santiso, 2006; Giovannetti, Sanfilippo, & Velucchi, 2013; Greenaway, Mahabir, &

Milner, 2008; Jenkins, 2012; Jenkins, Peters, & Moreira, 2008; Lall & Albaladejo, 2004; Lall,

Weiss, & Oikawa, 2005; Schott, 2008).

The most common approach to this subject evaluates the similarity in sectoral shares (structural

similarity) as a proxy of trade competition (Bl

azquez-Lidoy et al., 2006; Duboz & Le Gallo, 2011;

Langhammer & Schweickert, 2006; Schott, 2008; Vandenbussche, Comite, Rovegno, & Viegelahn,

2013; Wu & Chen, 2004). The Krugman Specialization Index (KSI; Krugman, 1991) and the

Finger–Kreinin index (Finger & Kreinin, 1979) are commonly used as baseline indicators (Palan,

DOI: 10.1111/twec.12492

World Econ. 2017;40:2301–2326. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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2010). Retaining this spirit but using an even simpler approach, other studies calculate correlation

coefficients between the sectoral shares, the ranking of these sectoral shares or the ranking of

revealed comparative advantage measures (De Benedictis & Tajoli, 2007; Lall & Albaladejo,

2004; Shafaeddin, 2004).

Another dimension considered in the empirical literature is the level of intra-sectoral similarity,

that is, the proximity in terms of quality ranges exported. In fact, the growing pattern of vertical

specialisation (Fontagn

e, Gaulier, & Zignago, 2008; Kaitila, 2010; Vandenbussche et al., 2013)

leads some researchers to consider measures that capture the similarity in terms of sectoral shares

and quality ranges simultaneously (Antimiani & Henke, 2007).

Crespo and Sim~

oes (2012) propose an even larger measure of structural similarity, which besides

sectoral shares similarity and intra-sectoral similarity also incorporates inter-sectoral similarity (eval-

uating how different the distinct sectors are). The basic argument is that sectors have distinct levels

of dissimilarity among them in what concerns their production requirements. Let us illustrate this

idea with a simple example. To that end, we consider three countries—countries 1, 2 and 3—totally

specialised in one sector: country 1 in potatoes, country 2 in tomatoes and country 3 in computers.

It is reasonable to assume that potatoes and tomatoes have more similar production requirements

than tomatoes and computers. Therefore, the index of structural similarity should be able to reflect

this situation, making clear that the level of structural similarity is higher in the first case. However,

the KSI is not able to capture this aspect as it indicates maximum dissimilarity whenever the coun-

tries under comparison export different sectors, as occurs in the example above. To overcome this

problem, Crespo and Sim~

oes (2012) propose the consideration of an average of the Krugman Index

calculated at different levels of sectoral disaggregation in order to evaluate not only the level of

actual competition (traditionally evaluated through the Krugman Index) but also the potential one.

Finally, in another important milestone in this literature, Jenkins (2008) puts the empha sis on

the concept of competitive threat and highlights that a measure that attends only to structural simi-

larity and ignores the level of overlap between total exports of the two countries under comparison

is strongly affected in its capacity to evaluate the critical aspects that are at the heart of the trade

competition reality at the world level.

The empirical studies produced in this area do not benefit however from a global concept ual

framework. Instead, these studies use partial measures that capture some important dimension of trade

competition between two countries but lack the consideration of other important elements. They are

therefore, at best, partial measures, making clear the need for new contributions in this research area,

namely with the objective of providing innovative insights regarding the measurement of trade com-

petition between two countries. The development of such framework is the main goal of this paper.

The approach developed in this study takes the KSI as starting point and incorporat es the two

main contributions of the study by Crespo and Sim~

oes (2012), thereby leading to a measure of

structural similarity that accounts for the three critical dimensions of this phenomenon simultane-

ously: sectoral shares similarity, inter-sectoral similarity and intra-sectoral similarity. By doing so,

we are able to obtain a richer measure of structural similarity. However, this is not enough to cap-

ture the real concept of trade competition. For that, we need to add to our measure of structural

similarity a way to incorporate the overlap between total exports of the two countries (i.e., the ratio

between the value of exports from the smaller country and the value of exports from the larger

country). Inspired by Jenkins (2008), we propose an adjustment to our previous indicator, obtain-

ing distinct indexes for each of the two countries under analysis.

In addition, while the common approach evaluates trade competition between two countries in

a specific destination market, we complement our methodological proposal by considering not only

a set of measures that correspond to this perspective but also indicators that aim to quantify the

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