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

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  • Caroline L. Freund
  • John McLaren

Abstract

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.

Suggested Citation

  • Caroline L. Freund & John McLaren, 1999. "On the dynamics of trade diversion: evidence from four trade blocs," International Finance Discussion Papers 637, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:637
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    References listed on IDEAS

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    4. 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.
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