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On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration

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  • Baier, Scott

    () (Clemson University)

  • Yotov, Yoto

    () (Drexel University)

  • Zylkin, Thomas

    () (National University of Singapore)

Abstract

We develop a novel two-stage methodology that allows us to study the empirical determinants of the ex post effects of past free trade agreements (FTAs) as well as obtain ex ante predictions for the effects of future FTAs. We first identify 908 unique estimates of the effects of FTAs on different trading pairs for the years 1986-2006. We then employ these estimates as our dependent variable in a “second stage” characterizing the heterogeneity in these effects. Interestingly, most of this heterogeneity (~ 2/3) occurs within FTAs (rather than across different FTAs), with asymmetric effects within pairs (on exports vs imports) also playing a important role. We offer several intuitive explanations for these variations. Even with the same agreement, FTA effects are weaker for more distant pairs and for pairs with otherwise high levels of ex ante trade frictions. The effects of new FTAs are similarly weaker for pairs with existing agreements already in place. In addition, we are able to relate asymmetries in FTA effects to each country’s ability to influence the other’s terms of trade. Out-of-sample predictions incorporating these insights enable us to predict direction-specific effects of future FTAs between any pair of countries. A simulation of the general equilibrium effects of TTIP demonstrates the importance of our methods.

Suggested Citation

  • Baier, Scott & Yotov, Yoto & Zylkin, Thomas, 2016. "On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration," School of Economics Working Paper Series 2016-15, LeBow College of Business, Drexel University.
  • Handle: RePEc:ris:drxlwp:2016_015
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    Cited by:

    1. Cosimo Beverelli & Alexander Keck & Mario Larch & Yoto V. Yotov, 2018. "Institutions, Trade and Development: A Quantitative Analysis," CESifo Working Paper Series 6920, CESifo Group Munich.
    2. repec:elg:eechap:17028_2 is not listed on IDEAS
    3. Mario Larch & Yoto V. Yotov, 2016. "General Equilibrium Trade Policy Analysis with Structural Gravity," CESifo Working Paper Series 6020, CESifo Group Munich.
    4. Chen, Natalie & Novy, Dennis, 2017. "Currency unions, trade and heterogeneity," LSE Research Online Documents on Economics 88487, London School of Economics and Political Science, LSE Library.
    5. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters,in: Handbook of International Trade and Transportation, chapter 2, pages 15-78 Edward Elgar Publishing.
    6. Borchert, Ingo & Yotov, Yoto V., 2017. "Distance, globalization, and international trade," Economics Letters, Elsevier, vol. 153(C), pages 32-38.
    7. James E. Anderson & Yoto V. Yotov, 2017. "Short Run Gravity," NBER Working Papers 23458, National Bureau of Economic Research, Inc.
    8. Lionel Fontagné & Gianluca Santoni, 2018. "GVCs and the Endogenous Geography of RTAs
      [Mondialisation des chaînes de valeur et la géographie endogène des accords commerciaux régionaux]
      ," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01763563, HAL.
    9. Scott French, 2017. "Comparative Advantage and Biased Gravity," Discussion Papers 2017-03, School of Economics, The University of New South Wales.
    10. Salvador Gil-Pareja & Rafael Llorca-Vivero & José Antonio Martínez-Serrano, 2018. "The happy few: cross-country evidence of the euro effect on trade," Working Papers 1803, Department of Applied Economics II, Universidad de Valencia.
    11. Gabriel Felbermayr & Fukunari Kimura & Toshihiro Okubo & Marina Steininger, 2018. "Quantifying the EU-Japan Economic Partnership Agreement," CESifo Working Paper Series 7241, CESifo Group Munich.
    12. Piermartini, Roberta & Yotov, Yoto V., 2016. "Estimating trade policy effects with structural gravity," WTO Staff Working Papers ERSD-2016-10, World Trade Organization (WTO), Economic Research and Statistics Division.
    13. Falvey, Rod & Foster-McGregor, Neil, 2017. "On the relationship between the breadth of PTAs and trade flows," MERIT Working Papers 038, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    14. Salvador Gil-Pareja & Rafael Llorca-Vivero & Jordi Paniagua, 2018. "Trade law and trade fl ows," Working Papers 1804, Department of Applied Economics II, Universidad de Valencia.

    More about this item

    Keywords

    Free Trade Agreements; International Trade; Gravity;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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