Impacts of Free Trade Agreements on Structural Adjustment in the OECD: Panel Data Analysis

Abstract

This paper examines the effects of FTAs such as the EU, the NAFTA, and the CER on production, employment, and industrial structure in the OECD. Specifically, this study implements the following two-stage approach. First, it applies an unbalanced nested error components model to the pooled data for the full 30 country, 16 industry, and 24 year sample. Second, it implements both one-way and two-way error component regression models to handle fixed effects and random effects along with country-specific and time-specific characteristics. This paper demonstrates that the coefficient on FTAs is statistically significant and positive, when we apply the nested error components model to the pooled data on the full 16 industries in the OECD, meaning that FTAs tend to enhance production and employment structures. When we analyze the country-specific and time-specific effects using the fixed effects model as well as the random effects model for the six industries, the coefficient on FTAs turned out to have different signs depending on the industry. The FTAs tend to increase the production share of agriculture, metal, and transport industries, while having opposite effects in the case of food, textile, and business services industries. On the other hand, the FTAs tend to increase the employment share of metal and transport industries, but decrease that of agriculture, food, textile, and business services industries.