《Networks versus markets in international trade》.pdf

Journal of International Economics 48 (1999) 7–35 Networks versus markets in international trade James E. Rauch* Department of Economics, University of California, La Jolla, San Diego, CA 92093-0508, USA Received 27 June 1996; received in revised form 26 August 1997; accepted 29 October 1997 Abstract I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative explanations for the findings.  1999 Elsevier Science B.V. All rights reserved. Keywords : Trade; Networks; Markets JEL classification : F10 1. Introduction It is well known that very few manufactured (as opposed to primary) commodities are traded on organized exchanges. It is also well understood that the heterogeneity of manufactures along the dimensions of both characteristics and quality interferes with the ability of their prices to signal relative scarcity. I argue that this uninformativeness of prices prevents ‘globally scanning’ traders from substituting for organized exchanges in matching international buyers and sellers of differentiated products. Instead connections between sellers and buyers are made through a search process that because of its costliness does not proceed until * Corresponding author. Tel.: 001-619-534-2405; fax: 001-619-534-7040. E-mail address: jrauch@weber.ucsd.edu (J.E