Estimation of trade specialization: The case of the baltic states

Abstract

Global trade environment has changed in three major ways in recent decades. International trade has grown rapidly in value and volume, the composition of trade has altered significantly, and trade flows have been extensively liberalised. Increasing international trade is crucial to the continuance of globalization. Globalization and integration processes are having a major impact on the international trade system. Current economic integration processes (accession of Lithuania, Latvia, Estonia and other States into the EU) expanded the boundaries of the European Union thus influencing tendencies of changes of nature and pattern of trade specialization.Trade among nations is traditionally explained as arising from the specialization of nations in particular industries as conditioned by the nation's relative factor endowments. Traditional theories such as comparative advantages or factor endowments state that countries with different resources or factor endowments will trade with each other. But empirical evidences show that countries with similar endowments do more trade these days. Based on new theories, monopolistic competition and increasing returns lead to intra-industry trade among countries, whereas the old comparative advantage is still applied for the countries separated by high economic distance. Trade specialization theories distinguish between inter-industry and intra-industry specialization. Inter-industry specialization refers to the simultaneous exchange of different goods. Countries specialize by exploiting their comparative advantages arising from differences in technology, innovativeness and differences in factor endowments. Many studies suggest that more developed countries and more specialized trade structure lead to higher intra-industry trade. To understand why economists have to turn their attention to these aspects, differences between inter-industry trade and intra-industry trade specialization are analysed in this article.Seeking to define the nature and pattern of trade specialization in the Baltic States, the basic theories of trade specialization and methods of measurement of inter-industry and intra-industry trade specialization are analyzed in this article. For analyzing the structure and determinants of country's foreign trade and identification the basis on which competitive advantages are built various measures of trade specialization are determined. Using relative trade advantage index and standard international trade classification, the nature and pattern of inter-industry trade specialization was established in the Baltic States. Using Grubel-Lloyd index and standard international trade classification the nature of intra-industry specialization in trade between the Baltic States and the EU was estimated. On the basis of researches it was determined that intra-industry trade share between the Baltic States and the EU over examined period has been growing rapidly.