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Do free trade agreements actually increase members’ international trade?

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Scott L. Baier
Jeffrey H. Bergstrand

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Abstract

For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable’s endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2005-03.

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Date of creation: 2005
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Handle: RePEc:fip:fedawp:2005-03

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jose Daniel Rodríguez-Delgado, 2007. "SAFTA: Living in a World of Regional Trade Agreements," IMF Working Papers 07/23, International Monetary Fund. [Downloadable!]
  2. Christophe Rault & Robert Sova & Ana Maria Sova, 2007. "Modeling International Trade Flows Between Eastern European Countries and OECD Countries," IZA Discussion Papers 2851, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Celestino Suárez-Burgnet & Inmaculada Martínez-Zarzoso & Laura Márquez-Ramos, . "Determinants of regional integration agreements in a discrete choice framework: Re-Examining the evidence," Working Papers on International Economics and Finance 05-10, FEDEA. [Downloadable!]
  4. Roland Rieder, 2006. "Playing Dominoes in Europe: An Empirical Analysis of the Domino Theory for the EU, 1962-2004," HEI Working Papers 11-2006, Economics Section, The Graduate Institute of International Studies, revised Jun 2006. [Downloadable!]
  5. Christophe Rault & Robert Sova & Ana Maria Sova, 2007. "The Role of Association Agreements within European Union Enlargement to Central and Eastern European Countries," IZA Discussion Papers 2769, Institute for the Study of Labor (IZA). [Downloadable!]
  6. Jelle Brouwer & Richard Paap & Jean-Marie Viaene, 2007. "The Trade and FDI Effects of EMU Enlargement," Tinbergen Institute Discussion Papers 07-077/2, Tinbergen Institute. [Downloadable!]
  7. Jérôme Trotignon, 2007. "Les Groupes régionaux latino-américains : building ou stumbling blocks ? Un modèle de gravité en données de panel," Pre- and Post-Print documents halshs-00174563_v1, HAL. [Downloadable!]
  8. Park, Innwon & Park, Soonchan, 2006. "Reform-creating regional trade agreements and foreign direct investment: applications for East Asia," MPRA Paper 1817, University Library of Munich, Germany, revised Jan 2007. [Downloadable!]
  9. Clougherty, Joseph A & Grajek, Michal, 2006. "The Impact of ISO 9000 Diffusion on Trade and FDI: A New Institutional Analysis," CEPR Discussion Papers 6026, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2007. "Estimating Regional Trade Agreement Effects on FDI in an Interdependent World," Center for Policy Research Working Papers 100, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  11. Jeffry Jacob & Thomas Osang, 2007. "Institutions, Geography and Trade: A Panel Data Study," Departmental Working Papers 0706, Southern Methodist University, Department of Economics. [Downloadable!]
  12. Deltas, George & Desmet, Klaus & Facchini, Giovanni, 2006. "Hub-and-Spoke Free Trade Areas," CEPR Discussion Papers 5960, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. KIMURA Hidemi & TODO Yasuyuki, 2007. "Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach," Discussion papers 07007, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  14. Gabriel J. Felbermayr & Wilhelm Kohler, 2007. "Does WTO Membership Make a Difference at the Extensive Margin of World Trade?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  15. Jelle Brouwer & Richard Paap & Jean-Marie Viaene, 2007. "The Trade and FDI Effects of EMU Enlargement," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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