A Measure of `Export Similarity' and Its Possible Uses

Author(s): J. M. Finger and M. E. Kreinin

Reviewed work(s):
Source: The Economic Journal, Vol. 89, No. 356 (Dec., 1979), pp. 905-912
Published by: Blackwell Publishing for the Royal Economic Society
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 The EconomicJournal, 89 (December1979), 905-912

Printedin GreatBritain

A MEASURE OF 'EXPORT SIMILARITY' AND

ITS POSSIBLE USES*

A number of propositions in international economics can be examined by the

use of an index measuring the similarity of the exports of any two countries
(or groups of countries) to a third market. Consider, for example the General
System of Preferences (GSP) granted by all industrial countries to the manu-
facturing exports of LDCs. Theoretically, such preferential treatment in favour
of LDCs gives rise to two effects: trade creation, displacement of domestic
production in the donor country by imports from LDCs; and trade diversion,
displacement of imports from other industrial countries by imports from the
now preferred LDC sources in the market of the donor countries. The latter
effect would be important if and only if LDCs export the same type of com-
modities as DCs to the market of donor countries. If exports are dissimilar -
i.e. subject to little or no 'commodity overlap' - then there is little scope for
trade diversion. Secondly, in GATT negotiated tariff reductions, the LDCs
receive all concessions negotiated among the industrial countries without
themselves having to reciprocate. But the concessions exchanged among the
industrial countries are usually in commodity categories that these countries
export to each other. Only to the extent that LDCs' exports to OECD countries
overlap the commodities exchanged by the DCs themselves, would any benefits
flow to the LDCs from such GATT tariff cuts. Finally, one can observe changes
over time in the similarity of exports between any two countries or groups of
countries, and thereby assess the degree to which their economic structure is
becoming more similar or more divergent.
These are examples of problems on which an export similarity index can shed
light. An advantage of such an index over other measures is that it requires only
international trade data, and these are available on a standardised basis for all
countries. In what follows we present and explain an index of export similarity.
It is then used to compute the similarity of exports between various countries
or groups of countries to the markets of: the United States, Japan, Old EEC
(six countries), and the rest of industrial Western Europe. The indices are
computed for the early sixties and the mid-seventies years. Policy implications
of the results are then discussed.

I. METHOD AND DATA

The proposed index of export similarity is defined by the formula

S(ab, c) = {E, Minimum [Xi(ac), Xi(bc)]} IOO,

i

* Only the authors are responsible for the contents of this paper. The order of the authors' names
was determined by flipping a coin.
[ 905 1
 906 THE ECONOMIC JOURNAL [DECEMBER

which measures the similarity of the export patterns of countries (or country
groups) 'a' and 'b' to market 'c', e.g. the similarity of LDC andJapanese
exports to the United States (the LDC and Japan being 'a' and 'b', and
the United States being 'c'). Xi(ac) is the share of commodity i in a's exports
to c. If the commodity distribution of a's and b's ex'ports are identical
(Xi(ac) = Xi(bc) for each i), the index will take on a value of IOO. If a's and
b's export patterns are totally dissimilar (for each Xi(ac) > o, Xi(bc) = o, and
vice versa) the index will take on a value of zero.
An intuitive 'feel' for this index can best be provided by example. Suppose
two exporters, a and b, sold the following amounts of each of two products to c:

Exporter
A -

a b

Product Value Xi (ac) Value Xi (bc)

I $1O OI $500 0o5
2 $90 o0g $500 0o5
Total $I00 I10 $1000 I10

S(ab, c) = ioo[min(o.i, 0o5) +min(o 9, 0o5)] = 6o.

Since the index is intended to compare only patterns of exports across product
categories, it should not be influenced by the relative sizes or scales of total
exports. To remove the scale effect, the exports of, say, a must be rescaled so
that they are equal in total to those of b. Thus a's 'hypothetical' exports of
products i and 2 would become $ioo and $900, respectively. Following this
rescaling, we ask, 'What proportion of a's exports is "matched " by exports of b
in the sameproductcategory?' In the example above, the entire $ I oo of a's (scaled)
exports of product i is matched by b exports of the same product, with $400
of b exports to spare. Of the $900 of a's (scaled) exports of product 2, only
$500 is matched by b exports of the same product. Hence, of a's $I,ooo of
(scaled) total exports, $6oo, or 6o % is 'matched' by b exports, and the export
similarity index would assume a value of 60.1
The data from which our calculations were made are the O.E.C.D. 'Series
C' import data, as maintained on tape in the Data Resources, Inc., data bank.
We used the most disaggregated data available, subject to the constraint that
the commodity categories be consistent across the different importing countries.
For the most part, this meant 4-digit SITC categories, although some parts of
the data were available at s-digit detail and others at only 3-digit level. In
total, 'Manufactured Goods' (SITC 5-8) were divided into 380 categories. All

1 G. D. A. MacDougall (I952, appendix C) derived an expression which measures the ratio of the
product by product elasticity of substitution (in demand) between imports from two different sources
to the aggregate (across all products) elasticity of substitution of imports from those sources.
As MacDougall pointed out, this formula can be interpreted as a measure of export similarity. But, as
we explain in an Annexe available from the first author, the MacDougall index is sensitive to the
relative scale of exports of the two exporters, and tends toward unity when one exporter is notably
larger than the other. As the comparisons we are making here frequently involve exports on vastly
different scales (e.g. the EEC and the Least Developed Countries) our index is more suited to our
purpose than the MacDougall index would be.
 1979] 'EXPORT SIMILARITY 907

calculations were made only over the SITC 5-8, and hence measure the
similarity of patterns of manufacturedexportsrather than of total exports.
For imports of the United States and European countries, data were available
from I 960 to I 974. Therefore, we calculated the similarity of exports to the United
States and to Europe for I960-I and for I973-4. In both periods the calcula-
tions were made from data which covered two years, so as to reduce the impact
on the index of year-to-year fluctuations of trade flows in particular products.
Japan was not an OECD member country in I960-I, hence Japanese import
data for I960-I are not in the OECD statistics. The 'early period' calculations
for Japan are for I966-7.
Country groups are precisely defined in an Annexe. The categories are those
commonly used in international trade discussion. The Old EEC is the original
six members, Other Industrial Europe is OECD Europe less the Six, the Middle
or Other LDCs are All LDC less both the seven Semi-Industrial LDC
Exporters of Manufactures and the 28 Least Developed.

II. RESULTS

Table I presents the highlights of the results.' An interesting result in Section A

is that in I973-4 US and EEC exports were about as similar as were EEC/Japan
exports, with index values of just higher than 50. The US/Japan figures are
lower - below 40. Thus by this measure the United States was as similar, in
1973-4, to the EEC as the EEC was to Japan. Comparing these figures across
time, we note that the US/EEC exports similarity index hardly changed from
I960-I to I973-4, while the Japanese export pattern has become more similar
to both the EEC and to the US export pattern. This is a reflection of the fast
growth and industrialisation of the Japanese economy. In conformity with
various studies showing the high degree of intra-industry specialisation that
accompanied the European integration process (e.g. Balassa, I966) the greatest
similarity obtains in intra-European trade - the index showing 7I in both
periods.
The export patterns of the three groups of LDCs (Semi-Industrial, Least
Developed, and the Middle or Other LDCs) are considerably less similar than
those of the different industrial countries. As one would expect, this is especially
true when the export patterns of the Semi-Industrial LDCs are compared with
those of the Least Developed. Also of note is the fact that the export similarity
of the Semi-Industrial LDC Exporters and the Least Developed has been
declining for exports to the United States and to Industrial Europe but rising
for exports to EEC and to Japan. From I960-I to I973-4 the figure fell from
28 to I 7 for exports to the United States, from I3 to IO for exports to Industrial
Europe, while rising from 7 to I 3 for the Old EEC. For exports to Japan, the
Semi-Industrial/Least Developed index rose from 6 to i8 between I966-7 and
I973-4. Thus the rapid expansion of exportsto the US and to non-EEC Europeby
the Semi-Industrial LDCs was accompanied by a shift of their export pattern
awayfrom the export pattern of the Least Developed. Patterns of exports to the
1 Additional comparisons are presented in an Annexe Table.
 THE ECONOMIC JOURNAL [DECEMBER
908

(D) (C) (B) (A)

Old Old
CP/US Middle Between
Middle
Middle
Middle US/Old
Between
CP/Old Between US/otherUS/Japan
CP/otherCP/JapanInvolving Exporting
Japan/other
EEC LDC EEC
Semi-industrial Semi-industrial
Semi-industrial Semi-industrial
Semi-industrial EEC/other EEC/Japan
Indices
LDC/US
centrally
CP/least-developed
LDC/Old
CP/semi-industrial developed
LDC/Least industrial developed
countries
of
industrial LDC/Japan
Least-developed/US
Least-developed/Old Groups industrial
Least-developed/Japan
EEC and or
LDC LDC/US areas
EEC LDC/Old industrial
Europe planned LDC/Japan LDC/LeastEurope areas
LDC/Middle Europe
LDCdeveloped
EEC Similarity
Europe of
LDC
economies developed

3 6i 25 35 Exports;
I7 I8 - i6 5 12 9 - 3' 14 - i6 25 28 26 28
I960-I
United

30 29 - 21 i6 31 II I0 17 - 12 28 30 17 21 I7 56 52 59 States Various
Table
1973-4 i

20 24 I5 - I 19 I 5 - 14 I0 28 I5 55 I8 6 59 48 46
I966-7 Exporters
Japan to
22 25 I8 17 35 9 5 - i6 i6 - 35 28 - 43 27 I8 65 50 - _ 5I
1973-4 Import
Various
35 39 32 28 5 25 3 3 I 17 I7 8 21 15 22 9 15 7 69 57 28 30 35 5I market
I960-I Old
Import
EEC
44 48 32 35 22 42 I0 "I 7 27 i8 i8 32 24 3' 39 32 13 65 62 43 49 38 5I
1973-4

Markets
'4 25 I3 71 56 28 31 33 56
35 37 27 28 5 27 7 9 4 i8 17 i6 I7 13 25
I960-I
Industrial

53 36 10 71 51 42 51 39 58
49 50 35 28 i8 33 13 '3 3 27 24 i8 25 22 28
1973-4Europe
 I979] 'EXPORT SIMILARITY' 909

United States and to Europe of the Middle LDCs and of the Least Developed
have become considerably more similar, but the opposite holds for exports to
Japan. Hence specialisationbetween the Middle LDC and the Least Developed
is increasing only in the Japanese market; specialisation between the Middle
and Semi-Industrial LDCs is increasing only in the US market,while specialisa-
tion between the Semi-Industrial LDC and the Least Developed is increasing
in the US and the non-EEC European markets.
Comparing the export patterns of the Semi-Industrial LDC with those of
the developed areas (section C of Table I), we note that the index figures are
generally in the 20-30 range - half the level yielded by the US/EEC
comparison, and considerably below that of the US/Japan comparison.
Comparing export patterns of the developed areas with those of the Least
Developed LDC yields very small figures-generally below I o. The export
pattern of Japan is no more similar to that of the LDC (either the Semi-
Industrial of the Least Developed) than is the export pattern of the other
developed countries.
Looking still at section C of Table I but across time rather than across
countries,we see that the export pattern of the Semi-IndustrialLDC has become
markedly more similar to the export patterns of the Old EEC and the United
States, and slightly more similar to the export pattern of Japan. This suggests
that the economic structuresof the Semi-Industrial LDC are coming closer to
those of the industrial countries. It also indicates that so far as competing with
the developed countries is concerned, the rapid expansion of exports by the
Semi-Industrial LDC was more a matter of 'joining the mainstream' than of
'doing their own thing'.
Finally, section D of Table I indicates that the export patterns of Centrally
Planned economies exhibit a high degree of similarity in West European
markets (but not in the United States) to the export patterns of both the Old
EEC and of Other Industrial Europe. Also in the mid-seventies (but not in the
early sixties) there was a relatively high degree of overlap between the Centrally
Planned and Semi-Industrial LDC's exports. This may well reflect a similarity
in the economic structure of the two groups of countries.

III. IMPLICATIONS

What do these results imply about the question raised at the first section? It
would appear that the trade diversion occasioned by the GSP of the major
industrial countries (the United States, Japan, and Old EEC) will mostly
benefit the seven Semi-Industrial LDCs. In the United States, Japan, and
Old EEC markets only the exports of this particular group of LDCs overlap
significantly with the intra-trade of the industrial countries. But Middle LDC
exports as well as Semi-Industrial LDC exports possess a significant degree of
overlap with industrial country exports to European industrial countries other
than the Old EEC.' This helps explain why the 'minor' GSP schemes (those
1 By inference when we compare Middle LDC/industrial country export similarity figures in the
Industrial European market with the figures in the Old EEC market.
30 ECS 89
9IO THE ECONOMIC JOURNAL [DECEMBER

of non-EEC European countries) have stronger trade effects than the 'major'
schemes (those of Japan, the EEC, and the USA) - per dollar of product
coverage they generate a larger amount of trade diversion (and the same
amount of trade creation) as do the 'major' schemes. And because trade diver-
sion (which displaces third country exports rather than domestic production)
tends to be a relatively large part of the trade effects of the 'minor' GSP, these
schemes tend to be less restrictive than the GSP schemes of the United States,
Japan and the EEC (MacPhee, I977).
Secondly, tariff concessions exchanged by the industrial countries under
GATT (applying mainly to their own exports but extended to other countries
on a most-favoured-nation basis) have probably been helpful in expanding the
exports of the Semi-Industrial LDCs, but less so the exports of other LDCs. This
may explain past dissatisfaction of most LDCs with the GATT arrangements.
But the similarity of LDCs' exports with that of the industrial countries is
rising over time, so in the future benefits from GATT tariff concessions would
become more widespread.
At the same time, these results indicate that so long as the LDC insist on
playing a non-reciprocal role at the GATT negotiations, further reductions
of trade barriers become less likely. The history of the GATT Rounds of
negotiations shows a strong tendency for participants to internalisethe benefits
from the concessions they exchange, i.e. to make concessions on products which
they import almost entirely from countries that give them concessions in
exchange (Finger, I979). Indeed, public choice theory strongly suggests that
the probability of such negotiations reaching a successful outcome depends
on the ability of the group to minimise 'free-riding', or to 'internalise' the
benefits generated by this collective action. Hence, as LDC exports come to
overlap more with industrial country exports, the 'free rider problem' becomes
more severe, and a successful GATT Round - with the LDC playing a non-
reciprocal, or free rider role - less likely.
An additional implication is that with the formation of a free trade area in
Europe, much of the preferences in favour of LDCs has been eroded.' The
LDCs do not market to Europe products similar to those of the United States
and Japan (the two industrial countries against which they are now preferred).
But the European GSP is still effective and meaningful in favouring LDC
against the centrally planned economies. Here the degree of commodity overlap
is high. However, if the state trading companies of the centrally planned
economies price exports by comparison with their competitors' prices rather
than by their own calculations of costs, a major effect of European preferences
would be to lower the prices Western Europeans pay for goods they import
from their centrally planned neighbours.

of the Treasury,Washington
Department D.C. J. M. FINGER
MichiganState University M. E. KREININ

Date of receiptoffinal typescript:

May I979
1 For similar results obtained by a different approach, see M. E. Kreinin (1974).
1979] EXPORT SIMILARITY 91II

REFERENCES
Balassa, B. (I966). 'Tariff reductions and trade in manufactures among the industrial countries.'
American Economic Review. Vol. 56 (June), pp. 466-73.
Finger, J. M. (I979). 'Trade liberalization: a public choice perspective', in American Enterprise
Institute Challengesto a LiberalInternationalEconomicOrder(forthcoming).
Kreinin, M. E. (I 974). TradeRelationsof the EEC - An EmpiricalInvestigation.NYC, Praeger.
MacDougall, G. D. A. (I 95I, 1952). 'British and American exports: a study suggested by the theory of
comparative costs.' ECONOMICJOURNAL; Part I, vol. 6i (Dec. 195I), pp. 697-724; Part II, vol. 62
(Sept. 1952), pp. 487-521.
MacPhee, C. (1977). 'The multilateral trade negotiations and the LDCs.' Paper presented at the
Midwest Economics Association Meetings, St Louis, March.

ANNEXE I. DEFINITIONS OF GEOGRAPHIC AREAS

Old EEC: France, Germany, Italy, Netherlands, Belgium-Luxembourg

OtherIndustrialEurope:Denmark, United Kingdom, Austria, Switzerland, Norway,
Sweden, Finland
Non-IndustrialEurope:Greece, Iceland, Ireland, Portugal, Spain, Turkey, Gibraltar,
Malta, Cyprus, Yugoslavia, Europe, nes.
Non-EuropeanDevelopingCountries:OECD's definition less developing countries in
Europe
DevelopingCountries:OECD's definition
CentrallyPlannedEconomies:OECD's definition (Sino-Soviet)
Semi-IndustrialLDC: Brazil, Hong Kong, Israel, South Korea, Taiwan, Mexico,
Singapore
LeastDevelopedCountries:
Afghanistan Gambia Niger
Bangladesh Guinea Rwanda
Benin Haiti Somalia
Bhutan Laos Sudan
Botswana Lesotho Tanzania
Burundi Malawi Uganda
Central African Rep. Maldives Upper Volta
Chad Mali Western Samoa
Democratic Yemen Nepal Yemen Arab Republic
Ethiopia
Middle DevelopingCountries:OECD definition of developing countries less the Semi-
Industrial and less Least-developed.
912 THE ECONOMIC JOURNAL [DECEMBER 1979]

Annexe Table
Indices of Similarity of Exports; VariousExportersto
VariousImportMarkets

Import market

Industrial
United States Japan Old EEC Europe

Exporting countries I960-I 1973-4 I966-7 1973-4 I960-I I973-4 I960-I I973-4

OECD/USA - - 22 24 33 35 28 36
OECD/Japan 7 46 - - II 25 14 25
OECD/Other Indust. Europe 20 43 21 i8 29 41 29 39
OECD/Old EEC I0 56 I7 17 26 30 21 33
OECD/Non-Indust. Europe 9 7 20 14 17 31 20 29
OECD/Centrally Planned 7 17 22 27 24 39 24 38
OECD/Middle LDC I0 i8 24 32 30 42 31 42
OECD/Least Developed I 6 i6 10 3 22 6 30
OECD/Semi-Indust. LDC 8 I I5 i6 10 20 i6 21
USA/Non-Industrial Europe - - 14 30 21 35 27 25
Japan/Non-Industrial Europe 27 20 - - 21 39 27 32
Other Ind. Eur./Non-Ind. Europe 20 25 17 43 28 47 28 53
Other Ind. Eur./Middle LDC 13 17 14 i6 17 27 14 30
Other Ind. Eur./Least Developed 7 6 7 9 3 II 6 12
Other Ind. Eur./Semi-Ind. LDC 32 25 20 28 17 25 14 28
Old EEC/Non-Ind. Europe 21 32 17 42 32 58 31 48
Non-Ind. Eur./Centrally Planned 14 30 13 21 38 51 27 50
Non-Ind. Eur./Middle LDC i8 15 46 I5 I8 35 27 39
Non-Ind. Eur./Least Developed 39 15 36 9 4 I5 7 '4
Non-Ind. Eur./Semi-Ind. LDC 41 43 20 28 24 40 39 48
Centrally Planned/Middle LDC 10 27 14 29 21 48 20 41