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Trade Creation and Diversion Effects of Regional Trade Agreements: A Product-level Analysis

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  • Shujiro Urata
  • Misa Okabe

Abstract

type="main" xml:id="twec12099-abs-0001"> This paper examines the impacts of regional trade agreements (RTAs) on trade flows at product level, with a particular focus on trade creation and diversion. Based on estimation of the gravity equation, dealing with the zero trade flows and endogeneity bias problems, we analyse the impacts of various types of RTAs involving 67 countries for 20 products during the 1980–2006 period. We find that RTAs among developing countries tend to cause trade diversion compared with RTAs among developed countries. Taking the higher external tariff rates of developing countries compared with developed countries into consideration, our results suggest trade diversion is likely to be caused by remaining high tariffs on imports from non-members. In addition, we find the trade creation effect for many products in the cases of Customs Unions and plurilateral RTAs. These results imply that trade creation would be caused by various factors besides the reduction in tariff rates. Based on these results, we draw a policy implication that external tariff rate reduction is an important factor in avoiding trade diversion in the formation of RTAs, in particular for RTAs among developing countries, while a large number of members and the common external tariff appear to be important for generating the trade creation effect.

Suggested Citation

  • Shujiro Urata & Misa Okabe, 2014. "Trade Creation and Diversion Effects of Regional Trade Agreements: A Product-level Analysis," The World Economy, Wiley Blackwell, vol. 37(2), pages 267-289, February.
  • Handle: RePEc:bla:worlde:v:37:y:2014:i:2:p:267-289
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    File URL: http://hdl.handle.net/10.1111/twec.2014.37.issue-2
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    Cited by:

    1. Lilik Sugiharti & Rudi Purwono & Miguel Angel Esquivias Padilla, 2020. "Analysis of determinants of Indonesian agricultural exports," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(4), pages 2676-2695, June.
    2. Hiroyuki Taguchi & Don Chalani Imasha Rubasinghe, 2019. "Trade Impacts of South Asian Free Trade Agreements in Sri Lanka," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 20(1), pages 1-18, March.
    3. Taguchi, Hiroyuki, 2018. "Trade impacts of South Asian Free Trade Agreements: The case of Sri Lanka," MPRA Paper 85238, University Library of Munich, Germany.
    4. Taguchi, Hiroyuki & Nishi, Emiko Darcy, 2017. "Trade effects of ASEAN-plus-China and -Japan free trade agreements by production stage and industry," MPRA Paper 81628, University Library of Munich, Germany.
    5. Al Faithrich C. Navarrete & Virgillio M. Tatlonghari, 2018. "An empirical assessment of the effects of the Japan–Philippine Economic Partnership Agreement (JPEPA) on Philippine exports to Japan: a gravity model approach," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 7(1), pages 1-20, December.
    6. Mon, Yi Yi & Kakinaka, Makoto, 2020. "Regional trade agreements and income inequality: Are there any differences between bilateral and plurilateral agreements?," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 136-153.
    7. Okabe, Misa & Urata, Shujiro, 2014. "The impact of AFTA on intra-AFTA trade," Journal of Asian Economics, Elsevier, vol. 35(C), pages 12-31.
    8. Frederik Stender, 2018. "MERCOSUR in gravity: an accounting approach to analyzing its trade effects," International Economics and Economic Policy, Springer, vol. 15(2), pages 501-522, April.
    9. KUNO Arata & URATA Shujiro & YOKOTA Kazuhiko, 2016. "Estimating the Impacts of FTA on Foreign Trade: An analysis of extensive and intensive trade margins for the Japan-Mexico FTA," Discussion papers 16003, Research Institute of Economy, Trade and Industry (RIETI).
    10. Selim Inançli & Haman Mahamat Addi, 2019. "Trade Creation and Trade Diversion Effects in the Economic Community of Central African States," African Development Review, African Development Bank, vol. 31(3), pages 307-317, September.
    11. KUNO Arata & URATA Shujiro & YOKOTA Kazuhiko, 2017. "FTAs and the Pattern of Trade: The case of the Japan-Chile FTA," Discussion papers 17091, Research Institute of Economy, Trade and Industry (RIETI).
    12. KATO Atsuyuki, 2019. "Exchange Rates and Intra- and Inter-Firm Trade in Japan," Discussion papers 19082, Research Institute of Economy, Trade and Industry (RIETI).
    13. Taguchi, Hiroyuki & Lee, Hak-Loh, 2016. "ASEAN-plus-one Free Trade Agreements and their trade effects," MPRA Paper 72503, University Library of Munich, Germany.
    14. M. Bruna Zolin & Utai Uprasen, 2018. "Trade creation and diversion: effects of EU enlargement on agricultural and food products and selected Asian countries," Asia Europe Journal, Springer, vol. 16(4), pages 351-373, December.
    15. Hiroyuki Taguchi, 2015. "Trade creation and diversion effects of ASEAN-plus-one free trade agreements," Economics Bulletin, AccessEcon, vol. 35(3), pages 1856-1866.

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