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Exploring the duration of EU imports

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Abstract

The objective of this paper is to perform an empirical description and analysis of the duration of EU imports from the rest of the world. Toward this aim, we employ a rich data set of detailed imports to individual EU-15 countries from 140 non-EU exporters, covering the period 1962–2006. Using these data, we both perform a thorough descriptive analysis of the duration of EU trade, and test the data in a regression analysis, using discrete-time duration models with proper controls for unobserved heterogeneity. Some interesting empirical findings emerge in our analysis. First, we find that EU imports from the rest of the world are very short-lived. The median duration of EU imports is merely 1 year. Moreover, almost 60% of all spells cease during the first year of service, and less than 10% survive the first 10 years. Second, we find that short duration is a persistent characteristic of trade throughout the extended time period that we study. Third, we find a set of statistically significant determinants of the duration of trade. Among the more interesting determinants is export diversification, which—both in terms of the number of products exported and the number of markets served with the given product—substantially lowers the hazard of trade flows dying. For instance, exporting a particular product to ten rather than one EU markets increases the probability of surviving the first year of trade in any given trade relationship by as much as 31 percentage points (from 33 to 64%).

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Notes

  1. For various approaches to this issue, see e.g. Helpman et al. (2008) or Santos Silva and Tenreyro (2006).

  2. Note that the benchmark data used by Besedeš and Prusa (2006a, b) is at the 7-digit US Tariff Schedule level, and at that level of aggregation, the median duration is 1 year. Since this paper uses the 4-digit SITC level of aggregation, to facilitate comparison, we here report the median of 2 years found by Besedeš and Prusa (2006a, b) when alternatively looking at the 4-digit SITC level of aggregation.

  3. Note, though, that Nitsch (2009) studies the duration of German imports. We also want to point out that we look at individual EU countries’ imports from the rest of the world, but exclude intra-EU trade. The main reason for this exclusion is that changes in intra-EU trade are to a large extent driven by a very complicated integration process, the analysis of which is beyond the scope of this paper.

  4. These results are largely confirmed by using the 10-digit (Harmonized System) US imports from 180 exporters for 1989–2001.

  5. The former is regarded as affecting growth at the extensive margin, while the latter two at the intensive margin.

  6. See e.g. Baldwin (1988), Baldwin and Krugman (1989), and Dixit (1989).

  7. See e.g. Melitz (2003), Bernard et al. (2003), or Yeaple (2005).

  8. For simplicity, we will refer to the “European Union”, though, of course, this term will not be formally correct in some instances.

  9. Since many EU-15 countries joined the European Union after 1962, we include a dummy variable in our regressions, that indicates for every year of a spell whether the respective importing country has already joined the European Union or not. It should be noted that, since Belgium and Luxembourg are treated as one trading block in the statistics, we have data for 14 importers in practice.

  10. Since the unknown starting date of left-censored spells renders the calculation of descriptive survivor functions impossible, all left-censored observations are excluded from the data used in this section.

  11. In this comparison, besides the differences in level of aggregation, it is important to stress that we, unlike Nitsch (2009), do not include intra-EU trade. This difference may to some extent explain the longer durations for German imports. In addition, Nitsch (2009) also studies a much shorter time period.

  12. So, for instance, in the case of 1-year gaps, two three-year spells separated by a 1-year absence from the market will be merged into a single 7-year spell.

  13. Both the importing EU countries and the exporters in the rest of the world diversify their trade quite substantially over the studied time period, both by trading new products and by entering new markets. Figures illustrating this development over time are available upon request. While we, in the interest of brevity, have chosen to only look at diversification from the importers’ and the exporters’ perspective, it is important to remember that exports (and imports) will also be diversified as soon as new trade relationships are formed. For example, countries starting to ship an “old” product to a country with which they already trade other products, but not this particular one, is also a type of diversification.

  14. We want to make clear that we do not intend any strict causal interpretation here. It is for instance possible that large economies export many products and at the same time have long export spells, which would explain the pattern found in Fig. 3c. It is, on the other hand, also possible that firms in countries that export many products have access to more information about foreign markets which could facilitate exporting activities. The regression analysis below, where many factors can be controlled for at once, is a better tool for testing these hypotheses.

  15. This could partly be the result of the importers in our data set being a more homogeneous group of countries than the exporters when it comes to trade.

  16. It may be noted that likelihood-ratio tests strongly reject the null hypothesis of no latent heterogeneity for all model specifications, implying that unobserved heterogeneity plays a significant role in all model specifications and should not be ignored.

  17. An alternative could be to include the level of per capita GDP, but the LDC dummy has the advantage of being based on a broader view of development which also takes various issues connected with economic vulnerability and human capital into account.

  18. Nitsch (2009) includes some similar variables when studying German imports: the number of imported products from a given supplier and the number of countries exporting the same product to Germany. Using our terminology, he therefore controls for import diversification, while we—on the basis of our findings in the descriptive analysis—control for export diversification.

  19. Two recent papers that draw similar conclusions on the importance of export diversification are Besedeš (2011) and Cadot et al. (2011).

  20. See e.g. Clerides et al. (1998) for a discussion. Wagner (2007) and Greenaway and Kneller (2007) offer overviews of the literature, and Martins and Yang (2009) conduct a meta-analysis of more than 30 empirical studies.

  21. The economic meaning of such dummies capturing first, second, third spells, etc. is sometimes discussed in the literature. While noting that the spell number dummies in our model all have negative signs, indicating that reoccurring trade spells have lower hazards, we want to point out that interpreting these coefficients is not really appropriate here. The reason for this is that even though a specific spell may be the first observed one in the data, there is no way of telling whether or not two countries have traded a particular product prior to the first year of the observation period. Thus, an observed “first” spell may actually be of a much higher order, rendering interpretation quite difficult.

  22. We have attempted a Hausman test to evaluate the appropriateness of a random-effects logit model versus a fixed-effects logit model. However, since the difference between the estimated covariance matrices of the fixed-effects and the random-effects estimates was not a positive definite matrix, we were unable to perform the test. This outcome is fairly common in empirical applications.

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Acknowledgments

This paper builds on the empirical part of Working Paper 2009:12, Department of Economics, Lund University, which was presented at the 2009 ETSG Conference in Rome and at seminars at Lund University and IFN in Stockholm. We are very grateful to two anonymous referees for their constructive comments. We would also like to thank conference and seminar participants, and in particular Yves Bourdet, Joakim Gullstrand, Scott Hacker, Magnus Henrekson, Fredrik Sjöholm, and Fredrik Wilhelmsson for many valuable comments. We are very grateful to Paul Linge and the LUNARC team for providing us access to very powerful computing resources. Financial support from the Jan Wallander and Tom Hedelius Foundation under research grant numbers P2006-0131:1, P2009-0189:1 and W2009-0352:1, and from the Marianne and Marcus Wallenberg Foundation is gratefully acknowledged.

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Authors and Affiliations

  1. Department of Economics and Centre for Economic Demography, Lund University, Lund, Sweden

    Wolfgang Hess

  2. Department of Economics, Lund University, Lund, Sweden

    Maria Persson

  3. Research Institute of Industrial Economics (IFN), Stockholm, Sweden

    Maria Persson

  4. P.O. Box 7082, 220 07, Lund, Sweden

    Maria Persson

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  1. Wolfgang Hess
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  2. Maria Persson
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Correspondence to Maria Persson.

Appendix: Auxiliary tables

Appendix: Auxiliary tables

See Tables 5, 6.

Table 5 Overview of exporting countries
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Table 6 Overview of variables and data sources
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Hess, W., Persson, M. Exploring the duration of EU imports. Rev World Econ 147, 665–692 (2011). https://doi.org/10.1007/s10290-011-0106-x

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