Can Trade Agreements Curtail Trade Creation and Prevent Trade Diversion?

This paper investigates how pre‐existing preferential trade agreements (PTAs) dilute the trade creation effect and shield the trade diversion effect of new PTAs. Countries having pre‐existing PTAs enjoy smaller gains in intra‐bloc trade because of the dilution effect and experience smaller losses or even gains in extra‐bloc trade because of the shielding effect. The findings support the proposition that PTAs could be used to fend off future trade diversion.     

Integration effects in the EEC: An attempt at quantification in a general equilibrium framework

This paper presents an attempt at quantitatively examining integration effects in the EEC within a general equilibrium framework. The methodology is based on multinational input-output analysis, where the national interindustry structures of the EEC-countries are linked together via gravitational trade flows. The analysis of trade effects is of the ex post type: Hypothetical trade flows of the customs union's anti-monde are calculated for the years 1965 and 1970 on the assumption that the structural relationships observed in 1959 remained unchanged, and comparison is made with actual trade flows. The results indicate substantial trade creation. There is little trade diversion, and external trade creation, where it occurred, is generally only a small fraction of internal trade creation. Substantial trade creation occurred in Italy, France, and Germany; trade diversion appeared in the Benelux countries. Sectors with high trade creation were agriculture and manufacturing industries, while trade diversion was concentrated in fuels and mining. The results conform with ex ante expectatations based on estimates of pre-union trade resistance.     

Regional Blocs and Foreign Direct Investment

The paper examines the impact of the emergence of regional blocs on the patterns of interbloc and intrabloc trade when firms have the option to engage in foreign direct investment (FDI). For exogenously given external tariffs, when firms have the option to engage in FDI, all interbloc trade may cease—complete trade diversion that is replaced by interbloc FDI investment creation. In such an event the volume of world trade declines but this is more than offset by the increase in world output due to direct investment. The paper also investigates the optimal tariff that a trading bloc levies on imports from nonmember countries. The tariffs are restricted by the option to engage in two‐way direct investment; hence, the regional blocs are hampered from mutually harming one another through an escalation in the tariff war. Finally, the formation of two regional blocs enhances the welfare of all countries.     

Do Preferential Rules of Origin Reverse Trade Creation and Trade Diversion?

Restrictive preferential rules of origin (PROOs) moderate the ‘trade diversion and trade creation’ effects of free trade agreements (FTAs). Moderation effects occur because restrictive PROOs reverse the increase in the relative price of non-member country goods initially caused by FTAs. Such a reversal arises because high compliance costs associated with restrictive PROOs lead to a lower utilization of tariff preferences by member countries. With a lower utilization, the increase in the relative price of non-members country goods would be smaller than it could have been with a full utilization. Thus, restrictive PROOs will lead to less than full trade diversion from non-members to member countries, and less than complete trade creation to member countries. This paper infers the effect of restrictive PROOs on intra-regional trade from the estimated parameters of the revenue function, on the presumption that trade diversion refers to a decrease in the elasticity of substitution between import sources, and that trade creation refers to a difference between the change in import price elasticity and the trade diversion effect. Empirical results support the conjecture that restrictive PROOs move in the opposite direction of FTAs partly undoing the trade diversion and trade creation effects of FTAs.     

Trade Creation and Diversion Effects of Europe's Regional Liberalization Agreements

After a short review of recent developments in gravity modeling and an overview of the liberalization agreements in Europe, this paper measures the trade creation and diversion effects of major European agreements based on the results of a correctly specified triple-indexed gravity model with bilateral fixed effects. Discussion of the resulting trade creation and diversion focuses on the role of partner and non-partner country characteristics including size and relative factor endowments, as well as date, reciprocity, industry coverage, and rate of liberalization characteristics of the agreement.     

Trade creation,trade diversion and imbalances in the EMU

The aim of this paper is to provide a unified explanation for the mixed evidence on the euro effect on trade and the development of imbalances in the European Monetary Union (EMU). It is argued that the two phenomena are the result of trade creation and trade diversion effects generated by the euro introduction and by globalisation-induced changes in trade patterns. Trade creation and trade diversion effects are estimated as structural changes in the relation between trade flows and financial opening, growth, prices, and measures of globalization. While most of these effects point to the increase in imbalances, financial opening is found to positively affect intra-EMU trade. On the other hand, GDP growth and global changes in production technology reduced intra-EMU trade. The results suggest that policies aimed at rebalancing the EMU should be strengthened and supported by measures aimed at improving the competitiveness of the single market as a whole.     

REFORM CREATING REGIONAL TRADE AGREEMENTS AND FOREIGN DIRECT INVESTMENT: APPLICATIONS FOR EAST ASIA

Abstract. We estimate the investment creation and diversion effects of RTAs by using an extended gravity equation focusing on domestic reform as a commitment device for RTA membership. As a case study, we estimate the impact of proposed East Asian RTAs on inward FDI. We find that: (i) reform creating RTA membership, larger market size, better skilled labour and lower trade costs all contribute positively and significantly to inward FDI; and (ii) most of the proposed East Asian RTAs promote intra‐bloc FDI. In particular, both South–North and North–North RTAs prove to be more preferable membership combinations to South–South RTAs in East Asia.     

Trade-creation and trade-diversion effects of regional trade arrangements: low-income countries

Although the number of regional trade arrangements (RTAs) among the lowest-income developing countries is surging, the literature on their welfare effects is still scarce, and the few that exist fail to provide conclusive results. Furthermore, these RTAs are dominated by countries with a small share of total exports destined for intraregional trade flows. Our study focuses on the welfare effects of RTAs (pertaining to trade creation and trade diversion) among this group of countries. We use a theoretically justified gravity model to estimate welfare effects, focusing on trade creation and trade diversion and deviating from the norm in related studies, accounting for heterogeneity in third countries. Using ECOWAS as a sample, we estimate welfare effects on 1992–2012 annual bilateral imports for 14 countries from 169 countries. Contrary to conventional expectations in the literature, we find that economic integration among small and relatively low-income countries that have a small share of total trade with each other is welfare-improving for the members as a group, for the majority of the individual member countries, and for some third countries. Accounting for heterogeneity in third countries reveals that an RTA among low-income countries has a particularly robust trade-creation effect.     

Welfare and Integration

This article argues that the terms‐of‐trade and volume‐of‐trade taxonomy from the theory of tariffs constitutes an attractive alternative to Viner's trade diversion and creation effects for the analysis of preferential trading arrangements. In applications of the alternative approach, the article establishes that results by Lipsey and Riezman on large versus small preunion trade flows for choice of partners are not ‘contradictory’ and that under some conditions a small country's optimal strategy is to seek membership of multiple free‐trade areas.     

ECONOMIC INTEGRATION AND TRADE PROTECTION: POLICY ISSUES FOR SOUTH ASIAN COUNTRIES

This article shows that economic integration acts as a viable instrument of protection for individual countries, when benefits of discriminatory protectionist policies like the multifiber arrangement are withdrawn. Using United Nations Conference on Trade and Development statistics for 1995–2013 and applying an extended version of the augmented gravity model, we show that the formation of a trade bloc like the South Asian Free Trade Area unambiguously promotes member countries' exports of textile and clothing at both intra‐bloc and extra‐bloc levels. The expansion of south‐south trade is facilitated by the growing intraregional trade in intermediate goods. The creation of a regional value chain can shield the smaller countries in the context of enhanced global competition. (JEL F14, F15, F13)     

Investment creation and diversion effects of the ASEAN–China free trade agreement

The ASEAN–China free trade agreement went into effect January 1, 2010 and became the world's third largest FTA by trade volume after the European Economic Area and the North American Free Trade Agreement. This paper focuses on highlighting the impacts of the reduction of barriers to trade on investment in a dynamic general computable equilibrium framework. We present and compare two alternative views/models of investment which yield different investment creation and diversion effects. As a first step, we adapt the dynamic GTAP model to take account of bilateral ownership of investment. Two versions of the model are considered. The first version is an example of applied models of investment demand, while the second is a model of investment supply. The two versions are based on different assumptions in their determination of cross-border investment. We simulate the implementation of ACFTA and we focus on the welfare impacts of investment creation and diversion.     

International Integration and Growth: A Further Investigation on Developing Countries

The paper examines empirically the linkages between international integration and economic growth in a panel of 47 developing countries and 18 trade blocs over the period 1970–1989. Specifically, it attempts to identify through which channel(s) – notably, specialization according to comparative advantage and increased efficiency, exploitation of increasing returns from larger market, and technology spillovers through investment and trade–trade blocs can affect the economic growth of their member countries. The results suggest that (1) intra-bloc trade does not affect growth significantly; (2) income diversion among member countries contributes positively and significantly to growth; and (3) the size of the trade bloc does matter in the sense that the bigger is not always the better for the welfare of the member countries.     

GATT,Preferential/Regional Trading Blocs and Agricultural Trade*

Agricultural trade impasses have again frustrated the GATT process. Interest in preferential/regional trading blocs is increasing. the paper probes the theoretical and empirical consequences of preferential arrangements instead of multilateral liberalization. It concludes that in a second-best world preferential arrangements could either improve or decrease global welfare. For agricultural trade, previous experience suggests that in regional groupings such as the EC trade diversion exceeded trade creation. This results from trade distorting domestic policies. Prospects for liberalization of agricultural trade under either GATT or preferential arrangements are limited. the consequences for small agricultural exporters are not positive.     

Trade liberalization and industrial structure in Spain: An applied general equilibrium analysis

We empirically evaluate the aggregate welfare effects and structural adjustment for the Spanish economy that would follow from trade liberalization with the European Economic Community. Recent theory suggests that the classical gains form more liberal trade relations could be amplified substantially if EEC liberalization permits Spanish industries to realize economies of scale. These effects depend upon the extent of trade creation and trade diversion resulting from preferential liberalization, which in turn depend on the existing patterns of Spanish resource allocation, trade, and comparative advantage. The estimated results are derived from disaggregated microeconomic model of the Spanish economy. We find that increasing returns can actually be beneficial or detrimental, depending upon the interactions between trade and policy toward domestic industry.     

What Determines Sectoral Trade in the Enlarged EU?

In this paper, we estimate a sectoral gravity model for trade within a heterogeneous trade bloc, the enlarged EU, comprised of a high‐income group (wealthiest EU), a middle‐income group (Greece, Portugal and Spain), and a low‐income group (new Central and Eastern European member countries). The estimation was conducted on sectors with different degrees of scale economies and skill‐intensities in the presence of transport costs. The results offer support for the call to incorporate trade theories based on both endowments and scale economies. In addition, whilst integrating poorer countries is beneficial for all of the participants in the bloc, there is still a role for a redistribution policy, such as the EU's Regional Policy, which should comprise a mix of policies, focusing on both income and education/skills, together with infrastructure development.     

Revisiting the effects of regional trade agreements on trade flows with proper specification of the gravity model

This paper uses a gravity model to assess ex-post regional trade agreements. The model includes 130 countries and is estimated with panel data over the period 1962-1996. The introduction of the correct number of dummy variables allows for identification of Vinerian trade creation and trade diversion effects, while the estimation method takes into account the unobservable characteristics of each pairs of trade partner countries, the endogeneity of some of the explanatory variables as well as a potential selection bias. In contrast to previous estimates, results show that regional agreements have generated a significant increase in trade between members, often at the expense of the rest of the world.     

Endogeneity of WTO in the gravity model： China and ASEAN

This paper studies the endogeneity of WTO dummy variable in the gravity model about the trade in the region of China and ASEAN. We first present a two-stage test approach for the endogeneity of WTO dummy, then transform the endogeneity problem to a simultaneous system about WTO and trade, and construct an MLE estimation approach to the simultaneous model. The estimate of the coefficient of WTO dummy is positive, as opposed to the negative sign in the exogeneity case. From the estimation of the endogenous model, WTO has creation fold effect and strong trade diversion effect on export model in the region.     

Trade creation and trade diversion in the Canada – United States Free Trade Agreement

In this paper the changes in trade patterns introduced by the Canada-United States Free Trade Agreement are examined. Variation in the extent of tariff liberalization under the agreement is used to identify the impact of tariff liberalization on the growth of trade both with member countries and non-member countries. Data at the commodity level are used, and the results indicate that the Canada-United States Free Trade Agreement had substantial trade creation effects, with little evidence of trade diversion. JEL Classification: F13, F14
Création de commerce et diversion de commerce dans l'Accord de libre-échange Canada-U.S. Ce mémoire examine les changements dans les patterns de commerce international engendrés par l'Accord de libre-échange entre la Canada et les Etats-Unis. La variation dans l'intensité de libéralisation tarifaire selon les secteurs dans l'Accord est utilisée pour identifier l'impact de la libéralisation tarifaire sur la croissance du commerce à la fois entre les pays membres et avec les pays non-membres. A l'aide de données par produits, on montre que l'Accord a eu des effets substantiels de création de commerce mais qu'il n'y a pas lieu de croire qu'il y a eu beaucoup de diversion de commerce.     

EU participation and the external trade of Greece: an appraisal of the evidence

This paper investigates the trade effects caused by the accession of Greece to the EU. A large part of the analysis is in terms of trade flows disaggregated by the 21 categories of the Greek Tariff Schedule. These series are original data sets which have been constructed by the author to be used here for the first time. The main message is that after 1981 events took a turn closer to the pessimistic pre-accession predictions. Our findings indicate that during the post-integration period the external trade of Greece has been reoriented towards the EU countries and Greece lost part of its comparative advantage in those sectors in which such an advantage exists. We also suggest that as far as imports are concerned, EU participation has caused gross trade creation for imports from the EU countries and gross trade diversion for imports from the Rest of the World. As far as exports are concerned, the results indicate that EU participation has caused only a modest increase in Greek exports to the EU market.     

How effective is the Free Trade Agreement in South Asia? An empirical investigation

We investigate the efficacy of preferential trade liberalization in changing the observed trade pattern among the South Asian countries that have entered into the South Asian Free Trade Agreement (SAFTA). Although in its nascent stage, some data are now available to provide an ex-post evaluation of the performance of this bloc. Using these data, we find no empirical evidence of trade creation among SAFTA members, which is not surprising given that tariff concessions in SAFTA are small and are offset by complicated rules of origin procedure. However, a substantial and statistically significant increase in exports from SAFTA members to the rest of the world is found. Several panel strategies are used to check the sensitivity of the results against the assumptions of the estimation strategies. As some key coefficient estimates are found to differ across estimation methods, policymakers in South Asia need to use care in relying on the results from empirical studies, including our own, in formulating their trade policies.