Abstract
This paper documents the steady decline in Central Asia’s intra-regional trade since the mid-1990s, defying the 3-fold increase in overall trade from 1996 to 2005. Estimations of potential trade using gravity model confirm that the Central Asian countries, relative to their level of income and other individual characteristics, tend to overtrade with the rest of the world, but significantly undertrade within the region. We explain the regional trade puzzle by employing Helpman’s test, which tests the determinants of intra-industry trade based on product differentiation and increasing returns to scale. Helpman’s test indicates that Central Asia as a whole has little intra-industry trade. Overall trade is found to be mostly of inter-industry type, driven by natural resource endowment of these countries. We conclude that Central Asia’s trade patterns, particularly its trade puzzle, seem to be a result of complex factors such as region’s strong comparative advantage in natural resource-based exports, lack of regional integration, and trade-conducive policies across the region.
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