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Economic Integration Agreements, Border Effects, and Distance Elasticities in the Gravity Equation

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  • Bergstrand, Jeffrey

    ()
    (Department of Finance Mendoza College of Business University of Notre Dame)

  • Larch, Mario

    ()
    (Rechts- und Wirtschatswissenschaftliche Facultät Universität Bayreuth)

  • Yotov, Yoto

    ()
    (School of Economics LeBow College of Business Drexel University)

Abstract

Using a novel common econometric specification, we examine the measurement of three important effects in international trade that historically have been addressed largely separately: the (partial) effects on trade of economic integration agreements, national borders, and bilateral distance. First, recent studies focusing on precise and unbiased estimates of effects of economic integration agreements (EIAs) on members' trade may be biased upward owing to inadequate control for exogenous unobservable country-pair-specific technological innovations (decreasing the costs of international relative to intranational trade); we find evidence of this bias using a properly specified gravity equation. Second, our novel methodology yields economically plausible and statistically significant estimates of the declining effect of "national borders" on world trade, now accounting for endogenous EIA formations and unobserved country-pair heterogeneity in initial levels. Third, we confirm recent evidence providing a solution to the "distance-elasticity puzzle," but show that these estimates of the declining effect of distance on international trade are biased upward by not accounting for endogenous EIA formations and unobserved country-pair heterogeneity. We show that these results are robust to a battery of sensitivity analyses allowing for phase-ins of agreements, lagged terms-of-trade effects, reverse causality, various estimation techniques, disaggregation, inclusion of intranational trade, and accounting for firm-heterogeneity and country-selection bias.

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Bibliographic Info

Paper provided by LeBow College of Business, Drexel University in its series School of Economics Working Paper Series with number 2013-7.

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Length: 40 pages
Date of creation: 05 Dec 2013
Date of revision:
Handle: RePEc:ris:drxlwp:2013_007

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Web page: http://www.lebow.drexel.edu/
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Keywords: International Trade; Economic Integration Agreements; Gravity Equations;

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  1. Lionel Fontagné & Thierry Mayer & Soledad Zignago, 2005. "Trade in the Triad: how easy is the access to large markets?," Sciences Po publications info:hdl:2441/10189, Sciences Po.
  2. Felbermayr, Gabriel, 2006. "Exploring the Intensive and Extensive Margins of World Trade," Munich Reprints in Economics 20646, University of Munich, Department of Economics.
  3. Yotov, Yoto V., 2012. "A simple solution to the distance puzzle in international trade," Economics Letters, Elsevier, vol. 117(3), pages 794-798.
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  5. Cipollina, Maria & Salvatici, Luca, 2006. "Reciprocal Trade Agreements in Gravity Models: A Meta-analysis," Working Papers 18877, TRADEAG - Agricultural Trade Agreements.
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  8. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  9. James E. Anderson & Yoto V. Yotov, 2008. "The Changing Incidence of Geography," Boston College Working Papers in Economics 698, Boston College Department of Economics.
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  12. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper 2005-03, Federal Reserve Bank of Atlanta.
  13. Berthelon, Matias & Freund, Caroline, 2004. "On the conservation of distance in international trade," Policy Research Working Paper Series 3293, The World Bank.
  14. James E. Anderson & Yoto V. Yotov, 2011. "Terms of Trade and Global Efficiency Effects of Free Trade Agreements, 1990-2002," NBER Working Papers 17003, National Bureau of Economic Research, Inc.
  15. Thierry Mayer & Soledad Zignago, 2011. "Notes on CEPII’s distances measures: The GeoDist database," Working Papers 2011-25, CEPII research center.
  16. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  17. Mayer, Thierry & Paillacar, Rodrigo & Zignago, Soledad, 2008. "TradeProd. The CEPII Trade, Production and Bilateral Protection Database: Explanatory Notes," MPRA Paper 26477, University Library of Munich, Germany.
  18. Peter Egger & Mario Larch & Kevin E. Staub & Rainer Winkelmann, 2010. "The Trade Effects of Endogenous Preferential Trade Agreements," SOI - Working Papers 1013, Socioeconomic Institute - University of Zurich.
  19. Larch, Mario & Norbäck, Pehr-Johan & Sirries, Steffen & Urban, Dieter, 2013. "Heterogeneous Firms, Globalization and the Distance Puzzle," Working Paper Series 957, Research Institute of Industrial Economics.
  20. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
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