Does Monopolistic Competition Explain Intraindustry Trade of Forest Products?
Intraindustry trade occurs when countries import and export the same product. We found, based on Grubel-Lloyd indices, that there is substantial intraindustry trade of forest products. The explanation of intraindustry trade by the Helpman-Krugman theory of monopolistic competition implies a unit elasticity of exports with respect to production. We studied the existence of such a relationship for 11 forest industries that produce and export roundwood, sawnwood, wood-based panels, wood pulp, and paper and paperboard. The hypothesis was tested with cross-section and time-series data from 43 countries observed from 1961 to 2002. We formulated static and dynamic versions of the relationship between exports and production and estimated them with panel data methods. The best results, based on pattern of the residuals and forecasting errors, were obtained with the static and the dynamic models estimated by ordinary least squares after differencing the time series. The strongest evidence of monopolistic competition was for the pulp and paper industries: newsprint, printing and writing paper, other paper and paperboard, and chemical and semichemical woodpulp. For other forest products, although there was a statistically significant relationship between production and exports, the long-run elasticity was significantly less than unity.