Influence of the US and China on the Trade between Developing Country Dyads: Panel Quantile Gravity Model

Abstract

This study is aimed to investigate the changing shape of the trade between 58 World Trade Organization member developing countries based on the effects of the US and China by employing the Gravity Model, using data from 3209 trade dyads between 1991 – 2015. For this purpose, a new variable is proposed as the logarithm of a function of the distances of country dyads to the US and China (einf) to measure the relative external influence of the US and China. As the trade volumes of country dyads in the sample change severely, the gravity model is estimated by penalized panel quantile fixed effects estimator proposed by Koenker (2004). Potential model misspecification is investigated with a Hausman-type test adapted for panel quantile regression. Findings suggest that the US and China have trade altering influence on developing country dyads, varying according to different quantiles of the conditional bilateral trade distribution.