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Trade Creation and Diversion Revisited

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Author Info

  • Chris Papageorgiou
  • Christian Henn
  • Theo S. Eicher

Abstract

Trade theories covering Preferential Trade Agreements (PTAs) are as diverse as the literature in search of their empirical support. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. BMA minimizes the sum of Type I and Type II error, the mean squared error, and generates predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we report clear evidence of Trade Creation, Trade Diversion, and Open Bloc effects. After controlling for natural trading partner effects, Trade Creation is weaker - except for the EU. To calculate the actual effects of PTAs on trade flows we show that the analysis must be comprehensive: it must control for Trade Creation and Diversion as well as all possible PTAs. Several prominent control variables are also shown to be robustly related to Trade Creation; they relate to factor endowments and economic policy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/66.

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Length: 30
Date of creation: 01 Mar 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/66

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Related research

Keywords: Trade models; trade creation; trade flows; trade diversion; bilateral trade; trade agreements; trading partners; free trade; international trade; probability; equation; preferential trade; trading partner; bloc trade; preferential trade agreements; probabilities; factor endowments; trade costs; trading blocs; world economy; common market; transport costs; bilateral trade flows; free trade agreements; predictions; equations; trade partners; preferential trading; trade creating; econometrics; trade theories; trade agreement; trade liberalization; trading arrangements; free trade area; trade area; preferential trading arrangements; trade openness; trade patterns; changes in trade; statistics; political economy; trade effects; andean pact; linear regression; industry trade; empirical framework; multilateralism; prediction; probability distribution; trade theory; trading system; trade flow; world trading system; stata; border trade; surveys; economic integration; estimation technique; exchange rate policy; multilateral trade negotiations; external tariffs; statistical technique; standard deviations; internal trade; fixed effects model; regional trade agreements; standard deviation; trade volume; statistical inference; preferential trading areas; number of regressors; neighboring countries; free trade agreement; multilateral trade; dummy variables; bilateral agreements; trade effect; correlation; trade reform; survey; economic cooperation; exchange rate regime; predictability; exchange rate risk; global trading; increase trade flows; free trade areas; world trade; open regionalism; open trade; exchange rate fluctuations; economic community; trade preferences; explanatory power; foreign trade; non-member countries; trade arrangements; trade volumes; statistical method; endogenous growth; bloc tariffs; trade blocs; global integration; exchange rate regimes; trade gains; bayes factors; free trade zones; aggregate shocks; trade negotiations; terms of trade; preferential trade liberalization; regional trade; average trade; trade areas; trade restrictions; policy harmonization; bilateral trade agreements;

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References

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Citations

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Cited by:
  1. Christian Henn & Theo S. Eicher, 2009. "One Money,one Market," IMF Working Papers 09/186, International Monetary Fund.
  2. Theo S. Eicher & Christian Henn, 2009. "In Search of WTO Trade Effects," IMF Working Papers 09/31, International Monetary Fund.
  3. Prüfer, P. & Tondl, G., 2008. "The FDI-Growth Nexus in Latin America: The Role of Source Countries and Local Conditions," Discussion Paper 2008-61, Tilburg University, Center for Economic Research.
  4. 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.

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