Do Customs Union Members Engage In More Bilateral Trade Than Free Trade Agreement Members?
This paper provides the first empirical analysis directly comparing the effects of customs unions (CUs) and free trade agreements (FTAs) on members' bilateral trade, while addressing the biases arising from log-linearization of the gravity model and crucial time-invariant unobservables. Since Fiorentino et al. (2007) question the popularity of CUs relative to FTAs, considering the latter to be more practical in the current trading climate, such a comparison seems especially relevant. While Baier and Bergstrand (2007) find an FTA to approximately double membersí bilateral trade after 10 years, it is actually a CU, and not an FTA, which doubles bilateral trade.
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