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The Impacts of Free Trade Agreements on Trade Flows: An Application of the Gravity Model Approach

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  • URATA Shujiro
  • OKABE Misa

Abstract

The proliferation of FTAs appears to have affected economic conditions in many countries through foreign trade. We attempt to discern the impacts of FTAs on foreign trade by using two approaches. One approach is to examine the changes in trade patterns before and after an FTA by using indicators of intra-FTA interdependence. The second approach is the estimation of a gravity equation to discern the impacts of FTAs on bilateral trade flows, i.e. trade creation and diversion effects. In the latter approach we extend the previous studies by enlarging the sample size in terms of the time-period, and also undertake an analysis by disaggregating the trade data with a presumption that the impact of FTAs is different for different sectors. The results of the analysis revealed several interesting observations. Our analysis of the total trade indicates that FTAs bring about trade creation effect and that trade diversion effect is limited. Besides, the results of our analysis of disaggregated trade data show different patterns among different products, and they identify trade diversion effect for many products in the case of the EU, the NAFTA, and the MERCOSUR but not for the case of the AFTA.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 07052.

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Length: 36 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:eti:dpaper:07052

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  1. Masahiro Endoh, 2005. "The effects of the GSTP on trade flow: mission accomplished?," Applied Economics, Taylor & Francis Journals, vol. 37(5), pages 487-496.
  2. Schiff, Maurice & Winters, L Alan, 1998. "Regional Integration as Diplomacy," World Bank Economic Review, World Bank Group, vol. 12(2), pages 271-95, May.
  3. Kozo Kiyota & Shujiro Urata, 2007. "The Role of Multinational Firms in International Trade: The Case of Japan," Working Papers 560, Research Seminar in International Economics, University of Michigan.
  4. Rose, Andrew K, 2003. "Which International Institutions Promote International Trade?," CEPR Discussion Papers 3764, C.E.P.R. Discussion Papers.
  5. Céline CARRERE, 2003. "Revisiting the Effects of Regional Trading Agreements on trade flows with Proper Specification of the Gravity Model," Working Papers 200310, CERDI.
  6. 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.
  7. 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.
  8. Maurice Schiff & L. Alan Winters, 2003. "Regional Integration and Development," World Bank Publications, The World Bank, number 15172, July.
  9. Maskus, Keith E, 1983. "Evidence on Shifts in the Determinants of the Structure of U.S. Manufacturing Foreign Trade, 1958-76," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 415-22, August.
  10. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  11. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
  12. Yusuf Shahid & M. Anjum Altaf & Kaoru Nabeshima, 2004. "Global Change and East Asian Policy Initiatives," World Bank Publications, The World Bank, number 14928, July.
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Cited by:
  1. Neil Foster & Robert Stehrer, 2011. "Preferential trade agreements and the structure of international trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 147(3), pages 385-409, September.
  2. Rod Falvey & Neil Foster-McGregor, 2013. "On the Trade and Price Effects of Preferential Trade Agreements," wiiw Working Papers 102, The Vienna Institute for International Economic Studies, wiiw.
  3. Neil Foster-McGregor & Johannes Pöschl & Robert Stehrer, 2010. "The Impact of Preferential Trade Agreements on the Margins of International Trade," wiiw Working Papers 70, The Vienna Institute for International Economic Studies, wiiw.
  4. Neil Foster, 2012. "Preferential Trade Agreements and the Margins of Imports," Open Economies Review, Springer, vol. 23(5), pages 869-889, November.
  5. Amélie Guillin, 2012. "The impacts of Regional Trade Agreements in force in Europe on trade in services," Economics Bulletin, AccessEcon, vol. 32(1), pages 685-697.

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