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On the dynamics of trade diversion: evidence from four trade blocs

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  • Caroline L. Freund
  • John McLaren

Abstract

This paper studies the dynamics of trade reorientation experienced when a country joins a regional trade bloc. We find that the joining country's trade orientation toward bloc countries typically rises along an `S'-shaped path. We estimate the size, speed, and timing of this adjustment path for a `typical' joining country, for four trade agreements. We find that, in the European Union (EU), the incumbent bloc countries' share of the joining country's trade typically rose by eighteen percentage points over the course of the adjustment; that this took twelve years; and that the adjustment began four years before the date of accession. MERCOSUR shows a similar pattern in progress, but NAFTA and EFTA are more idiosyncratic. We argue that the data provide strong evidence of anticipatory sunk investments made to prepare for accession.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 637.

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Date of creation: 1999
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Handle: RePEc:fip:fedgif:637

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Related research

Keywords: International trade ; Free trade;

References

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  1. Winters, L Alan, 1984. "British Imports of Manufactures and the Common Market," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 103-18, March.
  2. Winters, L. Alan, 1985. "Separability and the modelling of international economic integration," European Economic Review, Elsevier, vol. 27(3), pages 335-353.
  3. Thompson, Aileen J., 1994. "Trade liberalization, comparative advantage, and scale economies stock market evidence from Canada," Journal of International Economics, Elsevier, vol. 37(1-2), pages 1-27, August.
  4. Aileen J. Thompson, 1993. "The Anticipated Sectoral Adjustment to the Canada-United States Free Trade Agreement: An Event Study Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 253-71, May.
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Citations

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Cited by:
  1. Claire Economidou & Vivian Lei & Janet Netz, 2006. "International Integration and Growth: A Further Investigation on Developing Countries," International Advances in Economic Research, Springer, vol. 12(4), pages 435-448, November.
  2. Thomas J. Prusa & Robert Teh, 2010. "Protection Reduction and Diversion: PTAs and the Incidence of Antidumping Disputes," NBER Working Papers 16276, National Bureau of Economic Research, Inc.
  3. Rod Falvey & David Greenaway & Joana Silva, . "Trade Liberalisation and Human Capital Adjustment," Discussion Papers 10/08, University of Nottingham, GEP.
  4. Luca De Benedictis & Roberta De Santis & Claudio Vicarelli, 2005. "Hub-and-Spoke or else? Free trade agreements in the “enlarged” European Union," ISAE Working Papers 52, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  5. T. Huw Edwards, 2006. "Search and the Path-Dependency of Trade," Discussion Paper Series 2006_12, Department of Economics, Loughborough University, revised May 2006.
  6. 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.
  7. Soloaga, Isidro & Winters, L. Alan, 1999. "How has regionalism in the 1990s affected trade?," Policy Research Working Paper Series 2156, The World Bank.
  8. Kreinin, Mordechai E. & Plummer, Michael G., 2008. "Effects of regional integration on FDI: An empirical approach," Journal of Asian Economics, Elsevier, vol. 19(5-6), pages 447-454.
  9. 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.
  10. Coulibaly, Souleymane, 2009. "Evaluating the Trade Effect of Developing Regional Trade Agreements: a Semi-parametric Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 24, pages 709-743.
  11. Florian Mölders & Ulrich Volz, 2011. "Trade creation and the status of FTAs: empirical evidence from East Asia," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 147(3), pages 429-456, September.
  12. Shubham Chaudhuri & John McLaren, 2007. "Some Simple Analytics of Trade and Labor Mobility," NBER Working Papers 13464, National Bureau of Economic Research, Inc.
  13. Stephen Cameron & Shubham Chaudhuri & John McLaren, 2007. "Trade Shocks and Labor Adjustment: Theory," NBER Working Papers 13463, National Bureau of Economic Research, Inc.

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