Commodity Classification and Network Hypothesis in International Trade

Rauch (JIE, Vol.48, 1999) proposes the hypothesis that proximity and common language / colonial ties are more important for differentiated products than for homogeneous products in forming price information and matching international buyers and sellers. His gravity-model analysis, however, is not able to show strong evidence to support this hypothesis. In this paper, by using SITC and monopolistic competition hypothesis, I present the result that machinery, transport equipment and miscellaneous manufactured articles, which are classified into differentiated products, have little price information effect, which makes Rauch’s result ambiguous. This paper also shows the fact that the network hypothesis of trade is appropriate to the trade of crude materials, while monopolistic competition hypothesis is appropriate to the trade of mineral fuels. The degree of price information effect or substitution effect on trade of commodities depends not on their differentiation, but on their industrial origin. * Preliminary version. Do not quote without author’s permission. Comments are welcome.