Determinants of U.S. Textile and Apparel Import Trade

1964; Bawden, 1966; Koo, 1984; Sharples and Dixit, 1989; Mackinnon, 1976) has used spatial
equilibrium models on the basis of a mathematical algorithm. In these studies, trade flows are
explained by the prices of commodities in importing and exporting countries and transportation
costs between countries. However, Thompson (1981) and Dixit and Roningen (1986) explain
that spatial equilibrium models perform poorly in explaining trade flows of commodities that
could be distorted by both exporting and importing countries trade programs and policies.

Anderson (1979), Bergstrand (1985, 1989), Thursby and Thursby (1987), and Helpman
and Krugman (1985) apply microeconomic foundations in deriving the gravity model which
show that price variables, in addition to conventional gravity equation variables, are statistically
significant in explaining trade flows among participating countries (Oguledo and Macphee,
1994). Generally, a commodity moves from the country where prices are low to the country
where prices are higher. Therefore, trade flows are expected to be positively related to changes
in export prices (Karemera et al., 1999).

Eaton and Kortum (1997) also derive the gravity equation from a Ricardian framework,
while Deardoff (1997) derives it from a Heckscher-Ohlin (H-O) framework. But the H-O and
Ricardian theories of trade contradict with what prevails with trade in the real world. For
example, H-O postulates that the larger the differences in factor endowments between two
countries, the larger will be the incidence of trade. Deardoff shows further that if trade is
impeded and each good is produced by only one country, the H-O framework will result in the
same bilateral trade pattern as the model with differentiated products. Additionally, the author
states that if transaction costs from trade exist, then distance should be included in the gravity
equation.

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