Assessing the impact of the EU-Chile FTA on international trade

As preferential trade agreements (PTAs) multiply, understanding their impact upon economies in general, and international trade in particular, is increasingly important. Yet, important questions remain open about the magnitude of this impact. Among these, the sensitivity of trade flows to trade barriers is especially important: it determines how given tariff concessions may impact trade flows. As emphasised in the recent literature, these trade elasticities are also important from a theoretical point of view, since they condition the welfare impacts of trade shocks (Arkolakis et al., 2012). In this respect, PTAs can be considered as natural experiments, allowing elasticities to be estimated accurately. This paper proposes estimates of trade elasticities, focusing on the free trade agreement beteween EU and Chile, in force since February 2003. This Agreement is interesting from the European point of view, because it is among the first signed with a partner which is neither a neighbour nor a former colony. As such, this is an Agreement where trade per se is really a central motivation on both sides, and it can be considered as a blueprint for the Agreement being negotiated or considered. In this regard, policy evaluation is key to improve practices. For Chile, PTAs are especially important –Chile presdently has 22 Agreements in force, with 59 partner countries-, and this Agreement stands out due to the importance of the EU as a trading partner: , the EU was the destination for almost 18% of Chile’s exports in 2010, making it the second leading Chilean export market at that time (ranking second to China), and it supplied 14% of its imports (next to China and the US). In addition, this Agreement is to carry out a meaningful ex-post analysis, and detailed, reliable data are available on both sides. To avoid the bias derived from aggregate trade data, we focus on a product-level analysis. The econometric assessment is then based on the comparison of trade outcomes across products, investigating whether they are meaningfully linked to tariff cuts. In so doing, it is important to disentangle tariffs from other potential determinants of trade flows, linked to product-specific trends in supply and demand in the EU and in Chile. These trends are controlled for by studying, instead of bilateral export flows per se, their trend over and above what could have been expected based on exports to and imports from third countries. This “difference-in-differences” approach, applied at the product level, allows an accurate assessment of the link between tariff cuts and bilateral trade between the contracting parties. We first present the methodology employed and the way it is implemented. Estimation results are then presented, and used in simple simulations to give more specific insights about the nature of the trade impacts of the Agreement.