Trade effects of Regional Trade Agreements : trade creation and trade diversion within the Western Hemisphere
Muhammad, Kabeer; Yücer, Aycil (2010), Trade effects of Regional Trade Agreements : trade creation and trade diversion within the Western Hemisphere, International Journal of Economic Issues, 3, 2, p. 221-238
TypeArticle accepté pour publication ou publié
Journal nameInternational Journal of Economic Issues
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Abstract (EN)This paper provides an ex-post assessment of the Regional Trade Agreements (RTAs) to see whether RTAs have been trade creating or trade diverting. We estimate the impact of RTAs on trade flows for country pair with dyed fixed effects and time dummies. These fixed effects capture the determinants of trade flows normally included in gravity model specifications and control for yearly shocks to countries’ trade. We use a gravity model inspired and adapted from Santos Silva and Tenreyo (2005) estimated with a Poisson Pseudo-Maximum Likelihood (PPML) method, which circumvents the heteroscedasticity bias encountered with the usual Ordinary Least Square (OLS) estimators. Annual data from 38 countries covering six RTAs in the Western Hemisphere for the years 1986–2005 is used. Our estimation showed that PPML method reduces the estimated trade impacts of regional agreements. The estimates reveal that the trade creation variables are significant and positive except NAFTA and LAIA, while the trade diversion effects of the mentioned RTAs are varied remarkably. The insignificance of the trade creation variable for NAFTA seems due to the lack of sufficient number of observations since there are only three member countries.
Subjects / KeywordsRegional Trading Agreements; Gravity model; Poisson Pseudo-Maximum Likelihood; Trade Creation; Trade diversion
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