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On the dynamics of trade diversion: evidence from four trade blocs

  • Caroline L. Freund
  • John McLaren

This paper studies the dynamics of trade reorientation experienced when a country joins a regional trade bloc. We find that the joining country's trade orientation toward bloc countries typically rises along an `S'-shaped path. We estimate the size, speed, and timing of this adjustment path for a `typical' joining country, for four trade agreements. We find that, in the European Union (EU), the incumbent bloc countries' share of the joining country's trade typically rose by eighteen percentage points over the course of the adjustment; that this took twelve years; and that the adjustment began four years before the date of accession. MERCOSUR shows a similar pattern in progress, but NAFTA and EFTA are more idiosyncratic. We argue that the data provide strong evidence of anticipatory sunk investments made to prepare for accession.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 637.

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Date of creation: 1999
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Handle: RePEc:fip:fedgif:637
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  1. Thompson, Aileen J., 1994. "Trade liberalization, comparative advantage, and scale economies stock market evidence from Canada," Journal of International Economics, Elsevier, vol. 37(1-2), pages 1-27, August.
  2. Aileen J. Thompson, 1993. "The Anticipated Sectoral Adjustment to the Canada-United States Free Trade Agreement: An Event Study Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 253-71, May.
  3. Winters, L. Alan, 1985. "Separability and the modelling of international economic integration," European Economic Review, Elsevier, vol. 27(3), pages 335-353.
  4. Winters, L Alan, 1984. "British Imports of Manufactures and the Common Market," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 103-18, March.
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