Export and import composition as determinants of bilateral trade in goods: evidence from Russia

ABSTRACT

Conventional theory and several empirical studies state that incomes and exchange rates are the key determinants of the trade balance. Here, we argue that export and import composition are also key explanatory variables because some goods are inelastic and/or with a high added value, directly and indirectly affecting income and price elasticities and trade balance. Thus, if exports and/or imports significantly consist of price inelastic products, then, a positive and a negative effect, respectively, should be expected on the trade balance. Using bilateral trade data and dynamic panel models, we found that the ratio of exports of crude petroleum and natural gas (price inelastic goods) to total exports is significantly and positively associated with the Russian trade balance in goods. For its part, Russian imports of high-tech goods (income elastic and price inelastic with a high added value) show a negative association. The goods balance of Russia also responded to changes in relative income, but there is only weak evidence of reactions to changes in the exchange rate. These findings partially explain the persistent surplus in the Russian trade balance and current account.

KEYWORDS:

• Export composition
• import composition
• trade balance
• crude petroleum and natural gas
• high-tech goods

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. List of trade partners: Argentina, Australia, Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Mexico, Moldova, Mongolia, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania, Saudi Arabia, Singapore, Slovak Republic, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, United Kingdom, Ukraine, United States and Venezuela.

2. Trade blocs: Latin American and Caribbean (Argentina, Brazil, Mexico, Venezuela); Oceania (Australia, New Zealand); European Union plus Norway and Switzerland (Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Romania, Slovak Republic, Spain, Sweden, United Kingdom, Norway, Switzerland); USA and Canada; Asia (China, India, Indonesia, Iran, Israel, Japan, Korea, Mongolia, Pakistan, Saudi Arabia, Singapore, Turkey, Thailand); non-EU post-Soviet states (Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Ukraine); Africa (Egypt, South Africa).

3. In the years leading to the global financial crisis, profits of natural gas and crude petroleum increased significantly, i.e. there was a positive increment in the difference between the value of natural gas/crude oil production at world prices and total costs of production. Consequently, in the years before the global financial crisis, the prices of natural gas and crude petroleum were significantly high such as to increase the share of these export products in the total goods exports. However, since 2014, the price of crude petroleum and natural gas has been falling which has been reflected in a decrease in the share of these products in total exports.

4. Previous studies used the real exchange rate between the currency of the country of interest and the currency of the partner country. Actually, most of the international transactions take place in dollars, euros, British pounds or yens. Consequently, we think that the measure used here is a better approach of the appreciation or depreciation of the rouble. In addition, we replicated our regressions using bilateral real exchange rates and the results (not reported) are qualitatively the same.

5. Note that geographical distance has been included in previous studies on the bilateral balance (Khan & Hossain, 2012). However, we did not include these indicators due to data limitations and because distance seems to be irrelevant in the case of Russia, the largest country of the world sharing borders with many of its major partners.

6. In this manner, we keep the number of instruments low, accounting for the potential problem of too many instruments (Roodman, 2009).