Abstract
We use panel data consisting of 96 countries and covering the period 1960–2000 to investigate the effects of free trade agreements (FTAs) and hub-and-spoke systems of FTA on exports. Our empirical results imply an annual growth rate of 5.57% in exports and hence a doubling of exports after 12.4 years between FTA partners. Non-overlapping FTAs account for 4.12%, while hub-and-spoke FTAs account for 1.45% of the estimated export growth rate. This indicates that, in addition to the direct trade liberalizing effect of FTAs, the hub-and-spoke nature of FTAs has an additional positive effect on trade.
Highlights
A large and well-established empirical literature uses the gravity equation and crosssectional data to investigate the effect of free trade agreements (FTAs) on international trade flows
The fact that our results for the 43 control variables are largely consistent with economic intuition gives us some confidence that our empirical analysis will be able to isolate and identify the effects of FTAs and their hub-and-spoke nature on trade flows
And significantly, if we take into account both the direct effect of FTAs and the additional hub-and-spoke effect, the growth rate of trade implied by our FD results is 4.9%, which is quite close to the actual growth rate of 5.1% between FTA members computed from our data
Summary
A large and well-established empirical literature uses the gravity equation and crosssectional data to investigate the effect of free trade agreements (FTAs) on international trade flows. To the extent that such an advantage translates into more exports and trade, the hub-and-spoke feature of overlapping FTAs will have a positive effect on trade, above and beyond the direct, trade liberalizing effect of FTAs. The concept of hub-and-spoke trade systems is not new to the trade literature but empirical analysis has been limited to a few country-specific studies. Our contribution to the hub-and-spoke trade literature is that we apply the concept to hubs and spokes to FTAs, and perform a comprehensive empirical analysis of the effect of hub-and-spoke FTAs on international trade using panel data for 99 countries from 1960 to 1999. What has been thoroughly lacking in the empirical literature on hub-and-spoke trade systems is a comprehensive analysis using data from a large number of countries.
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