Gravity models of forest products trade: Applications to forecasting and policy analysis

Abstract

To predict the value of trade between countries, a differential gravity model of bilateral trade flows was formulated and estimated with panel data from 2005 to 2014 for each of the commodity groups HS44 (wood and articles of wood), HS47 (pulp of wood, fibrous cellulosic material) and HS48 (paper and paperboard). The parameters were estimated with a large database by ordinary least squares, fixed-effects and random-effects methods. For the three commodity groups, the results were stable across methods. For HS44, exports were inelastic (0.33 ± 0.19) with respect to the gross domestic product (GDP) of exporters and elastic (1.95 ± 0.15) with the GDP of importers. For HS47, exports were elastic with respect to the exporters GDP (1.67 ± 0.55) and importers GDP (1.10 ± 0.36). Exports of HS48 were inelastic with the exporters GDP (0.81 ± 0.21) and elastic with respect to the importers (1.00 ± 0.14). For all three products, there were marked decreases in exports in 2009 and 2012 independent of GDP. The estimated elasticities were used to predict the growth rate of trade flows from 2015 to 2020 based on exogenous GDP projections of the International Monetary Fund. Another application investigated the effects of the Trans-Pacific Partnership agreement on the trade of forest products between the 12 member countries.