FTAs and the Pattern of Trade: The case of the Japan-Chile FTA

Economists have long sought to explain the pattern of trade by developing international trade theories since the theory of comparative cost/advantage was developed by David Ricardo in the 19th century. Applying the Ricardian continuum goods model developed by Dornbusch, Fischer and Samuelson (1977) and by incorporating contributions from a new new trade theory (heterogeneous firm trade theory), we estimate the impacts of the Japan-Chile free trade agreement (FTA) (JCEPA) on extensive and intensive margins of Japan's exports to Chile. Our results show that the tariff liberalization under the JCEPA increases both extensive and intensive margins of Japan's exports to Chile. We also find that a rise in the ranking of comparative advantage caused by the JCEPA increased extensive margins. These findings indicate the importance of expanding FTA networks and promoting the use of FTAs, in order to increase trade. Governments can contribute to an increase in the use of FTAs by implementing the measures such as disseminating information about the benefits of using FTAs and simplifying the procedure for obtaining the certificate of origin, which is required for using FTAs.