S-Curve at the industry level: evidence from US-UK commodity trade

Backus et al. in (Am Econ Rev 84(1): 84-103, 1994) found that the cross-correlation function between terms of trade and trade balance resembles the letter S and labeled it the S-curve. Support for S-curve is rather weak in some cases, most notably US when aggregate trade data are used. Empirical regularities based on aggregate trade data may suffer from a potential bias stemming from aggregation. Indeed, by employing US bilateral trade data excellent support for the S-curve is recovered. The support, however, was rather weak at the level of US-UK bilateral trade. Suspecting aggregation bias again, we employ US-UK trade data at the industry level and find overwhelming support for the S-curve. Furthermore, commodity attributes play no role.