Exploring the linkages between Open Skies agreements signed by the United States and international trade development

Abstract

This paper uses panel regression techniques and trade gravity models to explore the linkages between Open Skies agreement (OSA) signed by the United States and recent bilateral trade development. US bilateral trade in services data is not available; thus only US merchandise trade by air data is used as dependent variable in this paper’s econometric analysis. US merchandise trade by air series has not experienced significant growth since the implementation of numerous Open Skies agreements in 2007. Few studies have analyzed the relationship between OSAs and trade. These provide the motivation for exploring if signing more Open Skies agreements continues to benefit recent US merchandise trade by air development, and if the performance of these policies depends on other macroeconomic factors and on the properties of the agreement itself. Using data between years 2004 and 2009, panel regression models suggest that the performance of Open Skies agreements are not robust to market volatilities. Reductions in air cargo costs and expansions of air markets resulting from OSAs are not strong enough to combat trade declines when the recession hits. On the other hand, free trade agreements exert large, positive influences to US trade by air even during times of economic slowdown. Yet, the duration of the Open Skies agreements and the economic power of the trading partners do influence the performance of these policies. The preferred model specifications are different for exports and imports by air data, which confirms that the performance of OSAs on exports is different from that on imports. Finally, model results indicate that the impact of Open Skies policies on passenger traffic flows indirectly improves US trade by air figures. OSAs have stimulated passenger traffic growth, and model results suggest that lagged passenger traffic is positively related to trade value. Increased business travel opportunities conducted prior to the delivery of the goods help lower information asymmetries and develop trust among the supply chain partners. Combination of these effects aids expansion of trade by air, as well as trade by other modes of transportation.