Intra-Industry Trade Development in the Baltic States

Abstract

This paper investigates intra-industry trade (IIT) dynamics for Estonia, Latvia, and Lithuania in 1999-2007. IIT is decomposed into its vertical and horizontal components based on differences in import and export unit values. Results show that shares of IIT have increased within the period, with vertical IIT dominating. Shares of total vertical and horizontal IIT have grown since 2004, the year of accession to the European Union. Using panel data analysis, we estimate three static models and a dynamic model of IIT determinants. We find market size to be important in the Baltic states for IIT in general and for horizontal IIT in particular. A negative relationship between distance and share of IIT is a standard finding. Among factor endowment variables, we find difference in human capital to be significant in explaining IIT.

Keywords:

• Baltic states
• determinants of intra-industry trade
• vertical/horizontal intraindustry trade