On the Trade Diversion Effects of Preferential Trade Agreements

PLOS ONE

Trade agreements are thought to raise trade integration, but existing preferential trade agreements (PTAs) are insufficient in measuring market access of products. This study develops a product-based coverage index of PTAs using the World Trade Organization (WTO) preferential trade agreements and calculates bilateral trade measures using the EORA multi-regional input-output (MRIO) tables covering 189 countries worldwide over the period 1990–2015; the structural gravity model is employed to test how PTAs affect bilateral trade. Our findings show that countries sharing a common PTA could boost the trade volume compared to those without PTAs, supporting the trade creation effect. However, the trade promotion effect of the product-based coverage index of PTAs is significant only if the member countries are low-and middle-income countries. Further, the wide range of product liberalization brought by PTAs can promote global production networks by stimulating the trade of intermediate good...

The two most populous countries of the world have embarked upon an extensive array of preferential trading agreements in recent decades. This paper investigates the impacts on trade creation and trade diversion of China's and India's 11 major preferential trade agreements using an augmented gravity model that takes into account zero and missing trade flows in the data, employing a Zero Inflated Negative Binomial (ZINB) regression model as suggested in the recent literature by Burger et.al (2009) and Kohl (2012). By examining the impacts on exports and imports of preferential trading agreements with their respective trading partners over time, the paper reveals asymmetries, lessons and implications for ongoing efforts towards economic integration that have ramifications for the wider Asian continent and for world trading patterns.

1993

Measuring the impact of potential trading blocks involving South Asian countries is the aim of this paper. The author broadens this line of research to analyze the impacts of other potential preferential trading arrangements. In particular, the author evaluates the effects of South Asia Regional Integration (among Bangladesh, India, Nepal, Pakistan and Sri Lanka), as well as preferential trade arrangements (PTA's) of individual South Asian countries with some non-regional partners like USA, NAFTA as a whole, European Economic Community, or EEC or an Asian Group. The tool for empirical analysis is an extended version of the simple and well-known Gravity Model of Bilateral Trade, such as the one used by J. Frankel et al. (1993). This paper estimates bilateral trade using the standard approach with explanatory variables like gross national product (GNP), GNP per capita, and distance, but the author also attempts to quantify the impact of restrictions to trade, basically represented...

… de Trabajo FUNCAS, 2009

The specialised literature calls preferential trade agreements (PTAs) that are drawn along continental lines natural, to distinguish them from intercontinental PTAs, which are called unnatural. The central statement of the hypothesis of "natural" trading partners is that to the extent that trade follows the natural lines dictated by proximity the formation of regional trading blocs is good. Such natural blocs are contrasted with unnatural blocs, PTAs between countries on different continents, which are less likely to be welfare improving through their impact on trade. The goal of this paper is to determine the effect on trade of continental and intercontinental PTAs. To this end, using the gravity equation we estimate trade creation and trade diversion effects of both kinds of PTAs on a sample of 182 countries over the period 1980-2007. The results indicate that trade creation forces prevail over trade diverting ones in continental PTAs whereas this is not the case for intercontinental preferential agreements.

Cuadernos de economía, 2009

show an increase in trade diversion as sub-regional trade agreements proliferated and enthusiasm for the Free Trade Agreement of the Americas declined. JEL: F02, F13, F15

Documentos de Trabajo RedNIE, 2020

In the last decade, there has been an intense development in trade models aiming to explain the determinants of bilateral trade. A seminal theoretical and methodological contribution is Anderson and van Wincoop (2003), who introduced the concept of multilateral resistance and structural gravity. However, there is still an important gap between the theoretical developments of the structural gravity model and its empirical applications. Two main issues come from the presence of zeros in bilateral trade and missing data for internal trade flows (own production oriented to the own market). The presence of zero trade flows has been considered in Santos Silva and Tenreyro (2006) and Helpman, Melitz, and Rubinstein (2008). The consequences of omitting internal transactions have not been much studied, even when its relevance may be greater due to a significant heterogeneity across countries’ openness. The objective of the paper is to analyze and characterize the consequences from omitting internal trade in the estimation of trade proximities (inverse trade costs) and on the values of multilateral resistances, which in turn will affect the comparative statics effects derived from different trade policy measures.

The World Economy, 2018

and Salvatici (2010), Greenaway and Milner (2002) and World Bank (2005) for meta-analyses of the trade effects of PTAs. World Bank (2005), for example, considers 362 estimates of a PTA dummy from 17 studies that cover different PTAs, time periods and equation specifications. One-third of the estimates are statistically insignificant, over 10% are negative and significant, and only just over 50% are positive and significant. The mean estimate is 0.79 but the standard error is 1.3.

2011

Since Jan Tinberben’s original formulation (Tinbergen 1962, Shaping the World Economy, The Twentieth Century Fund, New York), the empirical analysis of bilateral trade flows through the estimation of a gravity equation has gone a long way. It has acquired a solid reputation of good fitting; it gained respected micro foundations that allowed it to move to a mature stage in which the “turn-over” gravity equation has been replaced by a gravity model; and it has dominated the literature on trade policy evaluation. In this chapter we show how some of the issues raised by Tinbergen have been the step stones of a 50-year long research agenda, and how the numerous empirical and theoretical contributions that followed dealt with old problems and highlighted new ones. Some future promising research issues are finally indicated.

Economic Systems, 2011

Review of World Economics, 2011

2011

Since Jan Tinberben's original formulation (Tinbergen 1962, Shaping the World Economy, The Twentieth Century Fund, New York), the empirical analysis of bilateral trade flows through the estimation of a gravity equation has gone a long way. It has acquired a solid reputation of good fitting; it gained respected micro foundations that allowed it to move to a mature stage in which the "turn-over" gravity equation has been replaced by a gravity model; and it has dominated the literature on trade policy evaluation. In this chapter we show how some of the issues raised by Tinbergen have been the step stones of a 50-year long research agenda, and how the numerous empirical and theoretical contributions that followed dealt with old problems and highlighted new ones. Some future promising research issues are finally indicated.

Journal of International Economics, 2016

We examine whether the pursuit of free trade agreements (FTAs) a¤ects the prospects of global free trade di¤erently than the pursuit of Customs Unions (CUs). Our analysis is driven by a fundamental di¤erence between these two types of preferential trade agreements (PTAs): while CU members impose jointly optimal common tari¤s on non-members, members of an FTA adopt individually optimal external tar-i¤s. This implies that (a) FTAs are relatively more ‡exible than CUs since an FTA member is free to undertake further trade liberalization with respect to non-members whereas a CU member can do so only if all CU members wish to do the same and (b) coordination during tari¤ setting allows CU members to pool their market power. In our comparative advantage based three country framework, the formation of either type of PTA induces the non-member to lower its external tari¤s due to the reduction in the volume of exports ‡owing from members to the non-member (we call this external trade diversion). While the pursuit of CUs prevents free trade from emerging in equilibrium, the pursuit of FTAs does not. This key result is driven by the relative ‡exibility of FTAs; the higher market power of CUs by itself does not undermine the objective of reaching global free trade. Even if CUs are prohibited from raising their tari¤s above pre-existing levels, free trade still fails to obtain if the pursuit of PTAs takes the form of CUs.

Foreign Trade Review, 2023

The gravity model of trade (GMoT) has become popular among practitioners and academics lately, essentially because of its power to provide a comprehensive explanation of real-world trade data. Complementing this are Viner’s concepts of trade creation (TC) and trade diversion (TD), which have been crucial in the development of a conceptual framework for evaluating the trade implications of a trade agreement. This article attempts to conduct a bibliometric analysis for estimating TC and TD using the GoMT. It has been observed that the TC and TD estimations following the use of the GoMT are few. Additionally, TC and TD estimations for free trade agreements (FTA) have been conducted, but not so much for regional trade agreements (RTA). As a result, a broad range of research can be conducted, especially given the recent dynamic environment for new RTAs. A bibliometric analysis was undertaken to evaluate the current level of research on GMoT. The search was conducted through Scopus where ...

2010

The EU grants preferential access to its imports from developing countries under several trade agreements. The widest arrangement, in terms of country and product coverage, is the Generalised System of Preferences (GSP) through which, since 1971, virtually all developing countries have received preferential treatment when exporting to world markets. This paper evaluates the impact of GSP in enhancing developing countries' exports to EU markets. It is based on the estimation of a gravity model for a sample of 769 products exported from 169 countries to EU over the period 2001-2004. While, from an econometric point of view, the estimation methods take into account unobservable country heterogeneity as well as the potential selection bias which zero-trade values pose, the empirical setting considers an explicit measure of trade preferences, the margin of preferences. The analysis offers new empirical evidence that the impact of GSP on developing countries' agricultural exports to the EU is positive. This paper attempts to fill this gap in the literature by providing new empirical evidence of the impact of the EU GSP, the evaluation of which is based on the estimation of a gravity model using trade data at a very high level of disaggregation. With respect to the related literature on the impact of the EU GSP, the distinguishing features of the study are threefold.