Abstract
The gravity model is one of the most successful empirical models in economics to evaluate the effects of several factors on international trade or bilateral trade flows. Many factors that are related to trade barriers can influence the bilateral trade between two countries. Regional trade agreements (RTAs) are important factors, which can pave the path of bilateral trades. In this paper, I use GEPPML estimator of Anderson et al. (Estimating general equilibrium trade policy effects: GE PPML. CESifo Working Papers-5592, 2015) to evaluate the counterfactual welfare effect of SAFTA and AFTA on member countries as well as on the non-member countries. After accounting for potential endogeneity of RTAs, removal of AFTA causes 3.08% real GDP loss for member countries, removal of SAFTA causes 6.36% real GDP loss for member countries, and joint agreement of SAFTA and AFTA brings 0.71 real GDP gains for member countries. In all scenarios, trade diversion effect is not remarkable.
Highlights
Regional trade agreements (RTAs) have been proliferating since the mid-90 s
The number of RTAs has tremendously increased over time
SAFTA and AFTA were signed to pave the way for bilateral trade among member countries of the South Asian and Southeast Asian regions due to stalemate of the World Trade Organization on trade flow of small economy countries
Summary
Regional trade agreements (RTAs) have been proliferating since the mid-90 s. Unobservable policy or non-policy-related barriers can be positively correlated with the probability of forming an RTA; those omitted variables can produce inconsistent result by mixing with error term (Baier and Bergstrand 2007) Another source of concern is the potential reverse causality of RTAs to bilateral trade, i.e., whether a system of simultaneous equations is treating bilateral trade and RTAs as endogenous. Extending the methodology established in Baier and Bergstrand (2007), Hummels and Klenow (2005), Baier and Bergstrand (2009) provided the first evidence using gravity equations of both the intensive and extensive (goods) margins being affected by regional trade agreements employing a panel data set with a large number of country pairs, product categories, and RTAs from 1962 to 2000 They found the long-run effect of RTAs on bilateral trade flows is about 100%; the effect differs substantially across trade agreements. Distance is bilateral weighted distance between export and import countries, contiguity is a dummy variable whether two countries have same border or not, and RTA is a dummy variable, i.e., whether two bilateral trade partners have any regional trade agreement
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