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Trade effects of Regional Trade Agreements : trade creation and trade diversion within the Western Hemisphere

  • Muhammad, Kabeer
  • Yücer, Aycil
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    This paper provides an ex-post assessment of the Regional Trade Agreements (RTAs) to see whether RTAs have been trade creating or trade diverting. We estimate the impact of RTAs on trade flows for country pair with dyed fixed effects and time dummies. These fixed effects capture the determinants of trade flows normally included in gravity model specifications and control for yearly shocks to countries’ trade. We use a gravity model inspired and adapted from Santos Silva and Tenreyo (2005) estimated with a Poisson Pseudo-Maximum Likelihood (PPML) method, which circumvents the heteroscedasticity bias encountered with the usual Ordinary Least Square (OLS) estimators. Annual data from 38 countries covering six RTAs in the Western Hemisphere for the years 1986–2005 is used. Our estimation showed that PPML method reduces the estimated trade impacts of regional agreements. The estimates reveal that the trade creation variables are significant and positive except NAFTA and LAIA, while the trade diversion effects of the mentioned RTAs are varied remarkably. The insignificance of the trade creation variable for NAFTA seems due to the lack of sufficient number of observations since there are only three member countries.

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    File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/10626/1/muhammad.pdf
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    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/10626.

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    Date of creation: 2010
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    Publication status: Published in International Journal of Economic Issues, 2010, Vol. 3, no. 2. pp. 221-238.Length: 17 pages
    Handle: RePEc:dau:papers:123456789/10626
    Contact details of provider: Web page: http://www.dauphine.fr/en/welcome.html

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    1. Soloaga, Isidro & Winters, L. Alan, 1999. "Regionalism in the Nineties: What Effect on Trade?," CEPR Discussion Papers 2183, C.E.P.R. Discussion Papers.
    2. Magee, Christopher S.P., 2008. "New measures of trade creation and trade diversion," Journal of International Economics, Elsevier, vol. 75(2), pages 349-362, July.
    3. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
    4. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
    5. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
    6. Duc, Cindy & Lavallée, Emmanuelle & Siroën, Jean-Marc, 2008. "The gravity of institutions," Economics Papers from University Paris Dauphine 123456789/214, Paris Dauphine University.
    7. Aitken, Norman D, 1973. "The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis," American Economic Review, American Economic Association, vol. 63(5), pages 881-92, December.
    8. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, vol. 41(3-5), pages 753-760, April.
    9. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    11. Ghosh, Sucharita & Yamarik, Steven, 2004. "Are regional trading arrangements trade creating?: An application of extreme bounds analysis," Journal of International Economics, Elsevier, vol. 63(2), pages 369-395, July.
    12. Boriss Siliverstovs & Dieter Schumacher, 2007. "Estimating Gravity Equations: To Log or Not to Log?," Discussion Papers of DIW Berlin 739, DIW Berlin, German Institute for Economic Research.
    13. Haveman, J-D & Hummels, D, 1996. "Trade Creation and Trade Diversion : New Empirical Results," Papers 96-004, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
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