Analyzing Trade Liberalization Effects in the Egg Sector Using a Dynamic Gravity Model

Abstract

The objective of the paper is to explore potential changes in trade induced by a liberalization scenario when taking into account persistence in trading partners. Our approach is based on the development of a gravity model that takes into account the dynamics at the extensive margin of trade as well as the persistence effect of the intensity of trade. Our empirical contribution is on the egg sector, where the persistence in trading partners is acute. Our results indicate that the use of static models underestimate imports of table eggs by more than 50% in Canada, when compared with the use of panel dynamic specification. The dynamic specification helps explain why trade liberalizations often increase trade creation between countries that had already been trading partners, while new trading partnerships remain scarce following trade liberalization. Our results also confirm the importance of sunk cost and their negative impact on the probability of export market participation for developing countries. Those results raise questions regarding the benefit of trade liberalization for developing countries, in terms of accessing new market, if they do not benefit from special treatments.