A gravity model for world natural rubber trade

Abstract

The purpose of this empirical analysis is to investigate the determinants of world natural rubber trade flows based on gravity model among four largest exporting countries, namely, Thailand, Indonesia, Malaysia, Vietnam and their fourteen major importing partners: Brazil, Canada, China, France, Germany, India, Indonesia, Italia, Japan, Korea, Malaysia, Poland, Spain, Turkey and the US in the period of 2000 to 2013. The thesis uses panel data in a gravity model with different fixed effects and GMM model with exogenous instrument variables to control for endogeneity problems causing by the correlation among independent variables and the error term as well as time-varying multiple price term. The empirical results suggest that gravity model are reliably applied to a single industry, at least for the case of world natural rubber bilateral trade flows. Significant effects of economic size as well as and trade cost between trading countries with expected signs on world bilateral natural rubber trade reveals that both value and volume of bilateral natural rubber traded can be treated as alternative methods to explain the bilateral trade in gravity models even for disaggregated trade. The research findings also reveal that world’s natural rubber trade flows are positively affected by car production of importing countries when controlling for bilateral fixed effects and year dummies. It means that almost natural rubber in ASEAN countries are exported to countries with developed rubber downstream industry.