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Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects

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  • Theo Eicher
  • Christian Henn
  • Chris Papageorgiou

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 University of Washington, Department of Economics in its series Working Papers with number UWEC-2007-18-P.

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Date of creation: May 2010
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Publication status: Published in Journal of Applied Econometrics, Volume 2010
Handle: RePEc:udb:wpaper:uwec-2007-18-p

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  1. Rivera-Batiz, Luis A & Romer, Paul M, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 531-55, May.
  2. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," NBER Working Papers 7750, National Bureau of Economic Research, Inc.
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Cited by:
  1. Nakhoda, Aadil, 2013. "The impact of the exports of BRIC countries plus Turkey on the exports of Pakistan," MPRA Paper 52477, University Library of Munich, Germany.
  2. Enrique Moral-Benito, 2010. "Model Averaging In Economics," Working Papers, CEMFI wp2010_1008, CEMFI.
  3. Patricia Prüfer & Gabriele Tondl, 2009. "The FDI-Growth Nexus in Latin America: The Role of Source Countries and Local Conditions," DEGIT Conference Papers c014_025, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Theo S Eicher & Lindy Helfman & Alex Lenkoski, 2011. "Robust FDI Determinants: Bayesian Model Averaging In The Presence Of Selection Bias," Working Papers, University of Washington, Department of Economics UWEC-2011-07-FC, University of Washington, Department of Economics.
  5. Magnus, Jan R. & Powell, Owen & Prüfer, Patricia, 2010. "A comparison of two model averaging techniques with an application to growth empirics," Journal of Econometrics, Elsevier, Elsevier, vol. 154(2), pages 139-153, February.
  6. Neil Foster-McGregor & Robert Stehrer, 2010. "Preferential Trade Agreements and the Structure of International Trade," wiiw Working Papers 61, The Vienna Institute for International Economic Studies, wiiw.
  7. 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.
  8. Vanina Forget, 2012. "Doing well and doing good: a multi-dimensional puzzle," Working Papers hal-00672037, HAL.
  9. Christoph Moser & Andrew K. Rose, 2011. "Who Benefits from Regional Trade Agreements? The View from the Stock Market," NBER Working Papers 17415, National Bureau of Economic Research, Inc.
  10. Andros Kourtellos & Ioanna Stylianou & Chih Ming Tan, 2013. "Robust Multiple Regimes in Growth Volatility," Working Paper Series, The Rimini Centre for Economic Analysis 52_13, The Rimini Centre for Economic Analysis.
  11. Huigang Chen & Alin Mirestean & Charalambos G. Tsangarides, 2011. "Limited Information Bayesian Model Averaging for Dynamic Panels with An Application to a Trade Gravity Model," IMF Working Papers 11/230, International Monetary Fund.
  12. Christian Henn & Theo S. Eicher, 2009. "One Money,one Market," IMF Working Papers 09/186, International Monetary Fund.
  13. Theo S. Eicher & Christian Henn, 2009. "In Search of WTO Trade Effects," IMF Working Papers 09/31, International Monetary Fund.
  14. Magnus, J.R. & Powell, O.R. & Prüfer, P., 2008. "A Comparison of Two Averaging Techniques with an Application to Growth Empirics," Discussion Paper, Tilburg University, Center for Economic Research 2008-39, Tilburg University, Center for Economic Research.

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