Assessing and Explaining Trade Agglomeration in The Context of Global Trade
Jadhav Chakradhar and A V Manjunatha
Abstract
The advent of WTO regulations, the internet revolution, and improvements in logistics have reshaped the traditional view that geographical distance is the primary determinant of trade relationships. As a result, countries, for various reasons—regardless of the distance—have started to form closer ties. In this context, the paper first defines the concept of trade agglomeration. It empirically investigates the factors influencing trade patterns among 15 countries identified for their trade agglomerations, from1995 to 2022.The results show that factors such as GDP, population, trade openness, globalisation, FDI, internet penetration, and average governance indicators have a significant and positive impact on trade flows. In contrast, trade policy uncertainties, tariffs, and the real exchange rate have a significant and negative impact on trade. Countries like Denmark, Turkey, the Philippines, Portugal, and Romania stand out with a predicted trade-to-total trade ratio above one, indicating a relatively higher potential for trade expansion. Interestingly, the analysis finds that at higher quantiles, the impact of trade policy uncertainties on trade flows is significant and negative, whereas at lower quantiles, it has no significant effect. The findings suggest that countries agglomerate for trade based on shared interests driven by political and economic gains.