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Do trade agreements actually reduce trade volatility?

Author

Listed:
  • Josh Ederington
  • Yoonseon Han
  • Jenny Minier

Abstract

A frequently stated objective of regional and multilateral trade agreements is to provide a more stable and certain trading environment. Does this translate into reduced volatility of trade flows? Using a structural gravity approach, we identify two potential channels through which international trade institutions may influence the volatility of bilateral trade flows: by affecting the variance of trade barriers and by affecting the covariance of economic outcomes between the trading partners. We then use a panel of bilateral industry‐level trade data to empirically examine the effects of regional trade agreements and GATT/WTO membership on export earnings volatility. We find some evidence that joining a multilateral trade agreement such as the GATT makes export earnings less volatile. However, we find even stronger evidence that membership in a regional trade agreement increases the measured volatility in bilateral exports with other regional trading partners, and this rise in volatility increases as the agreement becomes deeper and more integrated. This increased volatility could be due to increased co‐movements of economic outcomes across regional trading partners; we also demonstrate that regional trade agreements increase the industry‐level covariance of importer expenditure and exporter production among member countries. Les accords commerciaux réduisent‐ils réellement la volatilité des échanges? Les accords commerciaux régionaux et multilatéraux ont souvent pour objectif de créer un environnement commercial stable et sûr, mais entraînent‐ils réellement une réduction de la volatilité des flux commerciaux? À l'aide d'un modèle gravitaire structurel, nous relevons deux canaux potentiels par lesquels les institutions commerciales internationales peuvent influencer la volatilité des flux commerciaux bilatéraux : en affectant la variance des barrières commerciales et en affectant la covariance des résultats économiques entre les partenaires commerciaux. Nous utilisons ensuite un panel de données sur le commerce bilatéral à l'échelle des industries pour examiner empiriquement les effets des accords commerciaux régionaux et l'appartenance au GATT/à l'OMC sur la volatilité des recettes d'exportation. Nous constatons que l'adhésion à un accord commercial multilatéral comme le GATT réduit la volatilité des recettes d'exportation. Cependant, nous trouvons des preuves encore plus solides que l'adhésion à un accord commercial régional augmente la volatilité mesurée des exportations bilatérales avec d'autres partenaires commerciaux régionaux, et que cette augmentation de la volatilité s'accentue avec l'approfondissement et l'intégration de l'accord. Cette volatilité accrue pourrait être due à l'augmentation des co‐mouvements des résultats économiques entre les partenaires commerciaux régionaux; nous démontrons également que les accords commerciaux régionaux augmentent la covariance à l'échelle des industries des dépenses des importateurs et de la production des exportateurs parmi les pays membres.

Suggested Citation

  • Josh Ederington & Yoonseon Han & Jenny Minier, 2025. "Do trade agreements actually reduce trade volatility?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 58(4), pages 1279-1310, November.
    • Handle: RePEc:wly:canjec:v:58:y:2025:i:4:p:1279-1310
    DOI: 10.1111/caje.70026
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