Do trade flows interact in space? Spatial origin-destination modeling of gravity

Abstract

PurposeThis study proposes spatial origin-destination threshold Tobit to address spatial interdependence among bilateral trade flows while accounting for zero trade volumes.Design/methodology/approachThis model is designed to capture multiple forms of spatial autocorrelation embedded in “directional” trade flows. The authors apply this improved model to export flows among 32 Asian countries in 1990.FindingsThe empirical results indicate the presence of all three types of spatial dependence: exporter-based, importer-based and exporter-to-importer-based. After further considering multifaceted spatial correlation in bilateral trade flows, the authors find that the effect of conventional trade variables changes in a noticeable way.Research limitations/implicationsThis finding implies that the standard gravity model may produce biased estimates if it does not take spatial dependence into account.Originality/valueThis paper attempts to offer an improved model of the standard gravity model by taking spatial dependence into account.

Geographical Proximity and Trade Impacts in the Central Asia Regional Economic Cooperation Program Region

“…In other words, the otherwise inflated estimates have been reduced to more realistic values by the inclusion of spatial dependence. This finding is in line with other studies, e.g., Luo and Choi (2022), LeSage and Thomas-Agnan (2012), Porojan (2001), andFotheringham andWebber (1980, p. 34). The variables related to border clearance in Table 5 show that the coefficient for border cost is decreased using equation 2 to -0.4 from -0.5 using equation 1, and that for border clearance time declines from -0.27 to -0.20.…”

“…There was a positive and statistically significant effect of origin-specific and destination-specific spatial dependence. These findings are in line with literature such as Barbero and Rodriguez-Crespo (2018), Luo andChoi (2022), andPace (2008). On the other hand, the coefficient ω is statistically not different than zero, which "implies that there is no significant competitive relationship across trading pairs when a dual neighboring relationship exists at both origins and destinations," as highlighted by Luo and Choi (2022).…”

“…In other words, geographically proximate exporters tend to mimic one another's exporting behavior. This stems partly from the similar resource endowments of neighboring exporting countries and the specialization in the production of the same or similar goods that results (Luo and Choi 2022). As Griffith and Jones (1980) pointed out, flows from an origin are "enhanced or diminished in accordance with the emissions propensity of its neighboring origin locations.…”

“…The study adapts this W matrix to the neighbor relationships unique to origin-destination flows to build the three spatial weight matrices W j , W i and W w to specifically model origin-centric, destination-centric, and origin-to-destination-centric dependence as illustrated by LeSage and Pace (2008). Luo and Choi (2022) mark a recent application of the approach. Through Kronecker product operations, W i = I n ⊗W reflects that a country's exporting behavior may stimulate or impede trade flows from its neighboring exporters to the same destination.…”