Study On China-U.S. Border Effect Model Of Agricultural Trade Based On Gravity Model

"Border effect"or"home bias"refers to the extent to which volume of domestic trade exceeds the volume of international trade. In other words, two different countries trade much less with each other than do two regions within one country, taking into account income, size and distance. One way to estimate the border effect is through Gravity Model of bilateral trade flows. The deduced border effect gravity model has been used successfully to measure the degree of fragmentation or integration of the economy, given that it will be observed if the access to the market in a specific region is different whether we consider local producers or producers of other regions.On the one hand, with China's fast economic development, its agricultural production, trade and sales have an increasing effect upon world agricultural trade pattern and market condition. Though China is world first major agricultural producer, its agricultural export accounted for only 2-4% of the world total agricultural export in the past two decades; U.S. is comparatively far away from China, but it turns out to be one of the major agricultural trade partners during the past decade, causing Chinese large number of trade deficit in agriculture. Thus it's necessary to study Chinese trade flow and direction of agriculture within China and with U.S., their influential factors and evolution over time in order to promote Chinese agricultural export to U.S. and increase international competitiveness of Chinese agricultural goods. On the other hand, this study helps to consolidate the theorectical foundation of Gravity Model and provide effective measures and policies in agricultural trade.But the border effect model is not without its problem. Firstly, current literatures about border effect gravity model prefer empirical study to theorectical study, so this model has been criticized by many scholars for its lack of therectical foundation. Different scholars apply different forms of model specification and different methods of variables'calculation to study the same issue, resulting in various magnitudes of border effects. Secondly, although there is vast literature about border effect in different countries or regions, they mainly focus on total merchandise trade. The study of agricultural trade using border effect gravity model needs more attention due to the non-substitutability of agricultural trade. Whether the same independent variables are involved in the Gravity Model and whether the border effects of agriclutral trade show the same pattern in magnigude and evolution as that of total merchandise trade remain unknown so far. Thirdly, many studies have applied the model to developed countries or regions, but the border effect study of developing countries or regions which enjoys a great percentage of the world both in polulation and in agriculture seems to have been ignored so far. Whether there are any differences in border effects between developing countries and developed countries and those among developed countries needs to be studied. China is the largest developing country and U.S. is the largest developed country and both are major countries in agriculture, but the study of these two countries seems to be untouched upon in past literature. Finally, most of the empirical studies of border effect provide the explanation of causes in the great magnitude of border effects, but how border effects change over time and across regions, and how different model specification and data choices influence the model results, namely robustness checks, need to be further studied to promote the reliability of the established model.By concluding the current literature, this dissertation establishes the border effect framework based on gravity model. Using regression method-OLS and PLS as research methods, this paper first presents two classifications of the model: 1) four border effect gravity models based on the direction of international trade and regional differences; 2) three models according to the number of the intercept to discriminate the discrepancies in each trading-pair over time, then it investigates the parameter estimation method, analyzes the relationships between dependent variables and independent variables, evaluates different models in interpretating border effects, presents five kinds of robustness check of the model, generalizes border effects in magnitudes and evolution over time and across regions of each model, and finally puts forward the causes of China-U.S. agricultural trade border effects and corresponding policy suggestions, which have been not touched upon in the current literature.The main contents and conclusions are summarized as follows:1 This dissertation analyzes the shortage in the current literature after setting forth the status of gravity model and border effect, and introduces the possible solutions provided by this paper.2 The second chapter shows the historical development of gravity model, introduces the concept, arrives at the gravity model based on different trade theories, studies and evaluates four kinds of border effect gravity model, discusses the calculation methods of border effect in detail. By comparing the existing method, it puts forward the differences of the models and their application in reality. Border effect gravity model is a new trade model which can precisely measure the difference between internantional trade and intra-national trade though it has its limitation. 3 The third chapter explores McCallum's standard border effect equation derived from the Gravity Model both in theorectical and empirical study. First, border effect gravity model is derived to fit the two-country agricultural trade by adding some variables capturing agricultural characteristics, which serves as the theoretical base of the empirical study. Then it uses the panel data covering from 1987 to 2005 to study the China-U.S. border effect of agricultural trade in magnitude and evolution over time using the Gravity Model, which has not been touched upon so far in the past literature. The results first indicate that border effect gravity model fits well in agricultural trade as well as total merchandise trade. Second, the main determinants of trade in a gravity framework--namely economic size and distance--have the same impact on agricultural trade as they have on total merchandise trade. As for new variables specific to agricultural trade, the estimates show that the exporter's higher share of agriculture in GDP, the importer's fewer land area and a lower rural population density are associated with higher bilateral trade flows of agricultural products. Border effect does exist between U.S. and Chinese agricultural trade. It is large in magnitude and tends to drop from 87.4 in year 1987 to 7.0 in year 2005. The border effect might result from the great geopolitical characteristics of two nations and historical characteristics of agriculture. China faces great challenges in order to comply with WTO rules and deal with agricultural issues. It has to strike a balance between economic reforms and inherent adjustment costs and to limit local government's economic interventionism.4 The fourth chapter further revises the standard border effect gravity model and establishes three other fixed-intercept model namely asymmetric homogeneous model, symmetric hetereogeneous model and asymmetric hetereogeneous model according to the direction of international trade and regional differences. From the panel data of year 1987 to 2005, the empirical study of China-U.S. agricultural trade reaches several conclusions. Firstly, the main determinants of trade in the gravity model--namely economic size and distance--have the same impact on agricultural trade as they have on total merchandise trade. For new variables capturing features of agricultural trade, the estimates show that a higher share of agriculture in GDP and a lower rural population density are associated with higher bilateral trade flows of agricultural products. Secondly, it's found that the China-U.S. agricultural trade is asymmetric and differs greatly from regions. What's more, regional discrepancies play a more important role in deciding the intercept and coefficients of independent variables of the model than the direction of international trade. Thirdly, the import and export border effects between U.S. and Chinese agricultural trade both exist over the period and are significant. Eight Chinese regions share the same pattern of border effect in magnitude and evolution over time as the border effect found in the fourth chapter, but border effects vary across regions. Generally speaking, the level of economic development, the convenience of transportation is negatively related to the magnitude of border effect. On the basis of fixed-interpect model, the changed-intercept model is put forward to catch unique characteristics of each trading-pair and the single-intercept model is compared with the former. Both models are also classified into symmetric homogeneous model, asymmetric homogeneous model, symmetric hetereogeneous model and asymmetric hetereogeneous model acooding to the types of the China-U.S. border. By using fixed-effects and pooled least square method, empirical study indicates that border effects are still large in all revised models and variables like economic sizes, distance, the share of gross agricultural product in GDP, land area and rural population density continue to affect the bilateral trade. Conclusions can also be made that border effects tend to be larger in the changed-intercept model than in the other two models. The more regional differences are concerned by the model, the bigger influence distance will have upon the bilateral trade. Finally, robustness check provides the reliability of the models put forward in this chapter.5 Based on both theorectical and empirical study of Chapter Three and Four, the fifth chapter generalizes what factors lead to the great magnitude and evolutionn over time across regions of border effects in all models by exploring the internal and external causes. It is found that the inherent characteristics of agricultural trade, government's protection policies, new change of China-U.S. agricultural trade, the non-equilibrium in development of Chinese domestic regions and the fluctuating exchange rate between China and U.S. constitute major factors resulting in the great magnitudes and evolution of border effects between China and U.S. agricultural trade.6 The sixth chapter first generalizes current suggetions on how to promote Chinese agricultural trade and then provides the possible solutions dealing with the issue of promoting Chinese agricultural export to U.S. and bilateral agricultural trade based on the border effect gravity model analysis, namely, expanding the scales of economies, especially those of agricultural economy, accelerating and facilitating rural labor shift, reducing soil erosion and bridging the international and domestic gap in farm.7 The seventh chapter concludes the dissertation and provides some prospects for the future study. The primary innovations include:1 Presenting the development of Gravity Model, arriving at the equations of border effect model in different trade theories and market conditions, establishing a framework of border effect gravity model followed by the introduction to its application in different fields.2 Putting forward two-county border effect model capturing the characteristics of agricultural trade, and further revising the model into three models according to the number of intercept and into four models according to the types of China-U.S. border in order to study the border effect of China-U.S. agricultural trade in magnitude and evolution over time.3 Generalizing various methods of robustness check of border effect gravity model in current literature and providing five kinds of robustness check to evaluate the reliability and linearity of border effect gravity model used in the empirical study of this paper, paving the way for interpreting and forcasting the bilateral agricultural trade volume and pattern.