Relatedness, Knowledge Diffusion, and the Evolution of Bilateral Trade

Abstract: During the last decades two important contributions have reshaped our understanding of international trade. First, countries trade more with those with whom they share history, language, and culture, suggesting that trade is limited by information frictions. Second, countries are more likely to start exporting products that are similar to their current exports, suggesting that knowledge diffusion among related industries is a key constrain shaping the diversification of exports. But does knowledge about how to export to a destination also diffuses among related products and geographic neighbors? Do countries need to learn how to trade each product to each destination? Here, we use bilateral trade data from 2000 to 2015 to show that countries are more likely to increase their exports of a product to a destination when: (i) they export related products to it, (ii) they export the same product to the neighbor of a destination, (iii) they have neighbors who export the same product to that destination. Then, we explore the magnitude of these effects for new, nascent, and experienced exporters, (exporters with and without comparative advantage in a product) and also for groups of products with different level of technological sophistication. We find that the effects of product and geographic relatedness are stronger for new exporters, and also, that the effect of product relatedness is stronger for more technologically sophisticated products. These findings support the idea that international trade is shaped by information frictions that are reduced in the presence of related products and experienced geographic neighbors.