Export Diversification: How Much Does the Choice of the Trading Partner Matter?

This paper studies how a country’s export diversification varies with the destination markets. It develops an extension of a model due to Romalis (2004) in which the combination of factor endowments and transport costs fully determine the commodity pattern of bilateral trade in a North- South world. The main prediction of the model is that exports between similarly endowed southern countries should be more diversified than exports from southern to northern countries, and this all the more when trade costs between southern countries are relatively low. This prediction is confirmed empirically with a highly disaggregated trade database (HS-6 digit) for 102 trade partners over the period 1995-2007. Results show that for any exporter country, the similarities in terms of endowments in physical capital, human capital and land with the importer and with its nearest neighbors lead to more diversified exports.