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An Econometric Analysis of Trade Creation and Trade Diversion in Mercosur: the Case of Paraguay

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  • Gauto, Victor F.
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    Abstract

    This paper analyzes the effects of Mercosur on Paraguayan import flows using detailed trade values to identify patterns of trade creation and trade diversion at aggregate and disaggregate commodity levels. It is well know that the share of foreign trade with respect to GDP is larger for small countries. Consequently, the effects of a trade agreement between large and small countries are likely to be larger in small economies. I use a variant of the gravity model employing a reparameterization of the difference-in-difference estimator to analyze import flows over time from member and non-member countries. Additionally, I explicitly include zero trade flows and implement a Heckman sample selection correction along with country fixed effects. I find the creation of Mercosur has increased average regional imports by 266% since 1995, which is evidence of trade creation. The greatest import expansions have been in Beverages and Tobacco and Animal and vegetable oils & fats. Finally, I do not find statistically significant evidence of trade diversion in any of the ten commodity categories.

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    Bibliographic Info

    Paper provided by International Association of Agricultural Economists in its series 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil with number 126864.

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    Date of creation: 2012
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    Handle: RePEc:ags:iaae12:126864

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    Keywords: International Relations/Trade; Research Methods/ Statistical Methods;

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    1. Helpman, Elhanan, 1995. "Politics and Trade Policy," CEPR Discussion Papers 1269, C.E.P.R. Discussion Papers.
    2. Soloaga, Isidro & Winters, L. Alan, 1999. "Regionalism in the Nineties: What Effect on Trade?," CEPR Discussion Papers 2183, C.E.P.R. Discussion Papers.
    3. Fukao, Kyoji & Okubo, Toshihiro & Stern, Robert M., 2002. "An Econometric Analysis of Trade Diversion under NAFTA," Discussion Paper Series a431, Institute of Economic Research, Hitotsubashi University.
    4. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
    5. Gert-Jan M. Linders & Henri L.F. de Groot, 2006. "Estimation of the Gravity Equation in the Presence of Zero Flows," Tinbergen Institute Discussion Papers 06-072/3, Tinbergen Institute.
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