Measuring Potential Trade Flows for two Emerging Economies : the case of Mexico and Thailand

Abstract

This study was conducted to assess the trade potential of Mexico and Thailand with their major trading partners and between themselves by using trade indices and gravity equation. The study computed the trade intensity index and then de-composed it into two additional indices namely, trade complementarity index and trade bias index. These indices were reliable in determining the examined country’s trade patterns and moreover, room for potential trade. The study also used the gravity model in combination with the trade indices to find factors determining (boosting or constraining) trade and used the estimated results to compute room for trade potential. Our study finds that the model can well explain the gap between actual trade and trade potential for Mexico and Thailand and their trading partners. The estimates indicated that economic size mattered and distance seemed to drive bilateral trade. Trade tariffs were found to be among the principal constraints on trade flows. Trade complementarity and trade bias as determinants in the gravity model explained the Mexican trade and to certain extent Thai trade patterns. Governance seemed to be more significant than the domestic rules and regulations. FDI was significant in driving and boosting trade. We conclude from the estimates of the gravity model that trade potential growth of Mexico and Thailand with their major trading partners and between themselves could be enhanced only after current restrictive trade conditions were reduced.