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Trade effects of Regional Trade Agreements : trade creation and trade diversion within the Western Hemisphere

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  • Muhammad, Kabeer
  • Yücer, Aycil
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    Abstract

    This paper provides an ex-post assessment of the Regional Trade Agreements (RTAs) to see whether RTAs have been trade creating or trade diverting. We estimate the impact of RTAs on trade flows for country pair with dyed fixed effects and time dummies. These fixed effects capture the determinants of trade flows normally included in gravity model specifications and control for yearly shocks to countries’ trade. We use a gravity model inspired and adapted from Santos Silva and Tenreyo (2005) estimated with a Poisson Pseudo-Maximum Likelihood (PPML) method, which circumvents the heteroscedasticity bias encountered with the usual Ordinary Least Square (OLS) estimators. Annual data from 38 countries covering six RTAs in the Western Hemisphere for the years 1986–2005 is used. Our estimation showed that PPML method reduces the estimated trade impacts of regional agreements. The estimates reveal that the trade creation variables are significant and positive except NAFTA and LAIA, while the trade diversion effects of the mentioned RTAs are varied remarkably. The insignificance of the trade creation variable for NAFTA seems due to the lack of sufficient number of observations since there are only three member countries.

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    File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/10626/1/muhammad.pdf
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    Bibliographic Info

    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/10626.

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    Date of creation: 2010
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    Publication status: Published in International Journal of Economic Issues, 2010, Vol. 3, no. 2. pp. 221-238.Length: 17 pages
    Handle: RePEc:dau:papers:123456789/10626

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    Related research

    Keywords: Regional Trading Agreements; Gravity model; Poisson Pseudo-Maximum Likelihood; Trade Creation; Trade diversion;

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    1. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    2. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
    3. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, vol. 41(3-5), pages 753-760, April.
    4. Soloaga, Isidro & Alan Wintersb, L., 2001. "Regionalism in the nineties: what effect on trade?," The North American Journal of Economics and Finance, Elsevier, vol. 12(1), pages 1-29, March.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    6. Aitken, Norman D, 1973. "The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis," American Economic Review, American Economic Association, vol. 63(5), pages 881-92, December.
    7. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
    8. Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
    9. Ghosh, Sucharita & Yamarik, Steven, 2004. "Are regional trading arrangements trade creating?: An application of extreme bounds analysis," Journal of International Economics, Elsevier, vol. 63(2), pages 369-395, July.
    10. Cindy Duc & Emmanuelle Lavallee & Jean-Marc Siroen, 2008. "The Gravity of Institutions," Economie Internationale, CEPII research center, issue 113, pages 95-113.
    11. Magee, Christopher S.P., 2008. "New measures of trade creation and trade diversion," Journal of International Economics, Elsevier, vol. 75(2), pages 349-362, July.
    12. Boriss Siliverstovs & Dieter Schumacher, 2009. "Estimating gravity equations: to log or not to log?," Empirical Economics, Springer, vol. 36(3), pages 645-669, June.
    13. Haveman, J-D & Hummels, D, 1996. "Trade Creation and Trade Diversion : New Empirical Results," Papers 96-004, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
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