Do free trade agreements actually increase members' international trade? |
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Authors: | Scott L. Baier Jeffrey H. Bergstrand |
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Affiliation: | a John E. Walker Department of Economics, Clemson University, Clemson, SC 29634, USA b Federal Reserve Bank of Atlanta, Atlanta, GA 30309, USA c Department of Finance, Mendoza College of Business, and Kellogg Institute for International Studies, University of Notre Dame, Notre Dame, IN 46556, USA d CESifo, Germany |
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Abstract: | For over 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and — in particular — the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not an exogenous variable. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members' bilateral trade after 10 years. |
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Keywords: | Free trade agreements International trade flows Gravity equation |
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