Linder Hypothesis and Trade of Quality Differentiated Good: A Case of Cosmetic Industry of China

In this paper, we tested if country similarity positively affects the index of vertical intra-industry trade share (VIIT), given that the lower developed country is bigger in size. By using the trade data of the cosmetic industry in China, we found that VIIT was higher when China traded with a country similar in size or similar in level of economic development. This finding suggested that perhaps recent papers failed to derive any support for Linder Hypothesis because their model settings did not take the asymmetric impact of relative country size into account.