Country Similarity Theory of International Trade

Country similarity theory was developed by a Swedish economist named Steffan Linder. Country similarity refers to what? Is it similarity of location or culture or political/ economic interests or technological capability (that is acquired advantage) or natural advantage or lack of it? Traditional trade theories speak of difference in demand or supply conditions or both as a necessary condition for trade between countries. That is, the traditional trade theories are built upon differences. But the country similarity theory is built of identical features of nations in trade. 8 out of top 10 trading partners of the USA are developed economies. Globally 11 out of 12 largest players in world trade are developed nations.

  • Developed countries trade more with developed countries: Products of a developed country match demand and user conditions of another developed country only. Hence the similarity in development pace decides trade between countries. The reasoning is that a developed country introduces a new product and similarly developed countries find the product quite useful and hence go for the same. This is because needs become more or less common in countries with similar levels of development. The industrialized countries produce more; hence people’s spend power is high; the power is apportioned between domestic and foreign goods, both of course catering to similar need satisfaction.
  • Countries in same cultural milieu trade more amongst themselves: Countries in same cultural milieu will have similar demands as for as cultural products/services like family functions, rites, rituals, entertainments, religious ceremonies and so on. Cross country offerings are more. Countries with no similarity either by cultural, technological or other basis may not trade. While countries in the northern hemisphere trade intensively inter se, countries in the southern hemisphere do not trade intensively. The pointed out reason is that no historic ties amongst the countries. Perhaps the traders do not want to taste new shores.
  • Countries in similar geo-features trade inter se more: Countries in similar geo-features like ecological or climatic factors will mutually cater to cross border demands. A kind of cross-border monopolistic competition emerges with firms vying for cross-country market share with the thrust on product differentiation.
  • Countries with similar political and economic interests trade more inter se: Trade between countries with similar political and economic interests is more common than between countries that differ. Cuba and US are in the same continent, but due to political ideological differences they scarcely trade for over 5 decades. Cuba is a good source of supply of sugar. But US prefers not to taste Cuban sugar. EU countries amongst themselves pulled down all protectionist impediments to trade and intra-regional trade is highest, because they have similar geo-features.
  • Intra-industry trade abetted by similarity factor: Similarly placed countries capabilities as well as needs happen to be similar. So, quite a lot of intra-industry trade among these similarly placed countries happens. US exports good lot of road vehicles and imports much road vehicles as well too. Needs are same across the nations. Offerings are also same across the nations, but product differentiation is built through top gear promotion. Intra industry trade happens because of sheer dispersed desire for foreign brands. Intra industry trade accounts for approximately 40 per cent of world trade.

Steffan Linder believed that international trade of manufactured goods occurred between countries at the same stage of economic development that shared the same consumer preferences. Therefore the country similarity theory consists of the value that most trade in manufactured goods should be between nations with similar per capita income, and that intra industry trade in manufactured goods should be common.

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