The impact of preferential trade agreements on bilateral trade: A structural gravity model analysis.

Bernhard Reinsberg,Xing Yao,Rizwana Yasmeen,Yongzhong Zhang,Zhen Cai

doi:10.1371/journal.pone.0249118

Abstract

Trade agreements are thought to raise trade integration, but existing preferential trade agreements (PTAs) are insufficient in measuring market access of products. This study develops a product-based coverage index of PTAs using the World Trade Organization (WTO) preferential trade agreements and calculates bilateral trade measures using the EORA multi-regional input-output (MRIO) tables covering 189 countries worldwide over the period 1990-2015; the structural gravity model is employed to test how PTAs affect bilateral trade. Our findings show that countries sharing a common PTA could boost the trade volume compared to those without PTAs, supporting the trade creation effect. However, the trade promotion effect of the product-based coverage index of PTAs is significant only if the member countries are low-and middle-income countries. Further, the wide range of product liberalization brought by PTAs can promote global production networks by stimulating the trade of intermediate goods. Our results are important for understanding the market access effect of PTAs with the increasing development of trade integration and global value chains (GVCs).

Highlights

Since the 1990s, the delay in the Doha Round negotiations caused the multilateral trading system to weaken, and countries turned to preferential trade agreements (PTAs) negotiations as a solution
Based on the measures above, we investigate the effect of the coverage index of PTAs on bilateral trade using the structural gravity model, which can better estimate the marginal effect of PTAs on bilateral trade and are popular among previous studies [28, 29, 33]
PTAs can help countries sell final products and promote the welfare of countries, and be embedded in the global value chains (GVCs) through intermediate goods trade, suggesting that the product liberalization brought by PTAs can promote the development of the global production network

Summary

Introduction

Since the 1990s, the delay in the Doha Round negotiations caused the multilateral trading system to weaken, and countries turned to preferential trade agreements (PTAs) negotiations as a solution. Constructing the product-based coverage of PTAs and investigate the effect of the product-based coverage of PTAs on different types of bilateral trade can fill the literature gap by showing how the product market access level affect bilateral trade. In contrast to previous literature, we construct the product-based coverage index of PTAs using WTO regional trade agreement datasets to measure the level of market access of PTAs. some scholars have measured the depth and flexibility of PTAs, few have explored their heterogeneous effect using different measures. We divide countries into low-, middle-, and high-income groups and tested the effect of PTAs on trade among different groups, the results show that the coverage index of PTAs is only significant if the members are low-income and middle-income countries; for these countries, market access barriers are still there, and liberalization of more products in the PTAs can promote trade. We divide trade into intermediate, final goods, service and commodity trade goods to evaluate the impact of PTAs on them from the GVCs perspective

Literature review

The structural gravity model

Construction of the product-based coverage index of PTAs

Construction of bilateral trade variables and other variables

Baseline results of how PTAs affects bilateral trade

Robustness checks

Heterogeneity analysis of different countries

Effect of product-based coverage index on trade components

Conclusion

Findings

41. World Trade Organization 2001: Ministerial Declaration