Vertical intra-industry trade, technology and income distribution: A panel data analysis of EU trade with Central-East European countries

Abstract

This paper tests a neo-Heckscher-Ohlin versus a neo-Ricardian framework for explaining vertical intra-industry trade. The study applies panel techniques with instrument variables to analyse trade between ‘old’ EU and 10 Central-East European countries in their post-transition period. Results show country-pair fixed effects to be of high relevance for explaining vertical intra-industry trade. Technology differences are positively, while differences in factor endowment, measured in GDP per capita, are negatively correlated with vertical intra-industry trade, and confirm the relevance of the neo-Ricardian approach. In addition, changing bilateral differences in personal income distribution during the transition of Central-East European countries towards a market economy contribute to changes in vertical intra-industry trade.