The Impact of Regional Trade Agreements on International Trade

Yutaka Kurihara

doi:10.4236/me.2011.25094

Abstract

The gravity model of international trade states that bilateral trade flows based on the economic sizes and distances between two units can be used to examine reasons for international trade. Regional Trade Agreements (RTAs) have appeared recently and have increased markedly in number; however, despite their importance, little study has been performed to analyze the effects of RTAs on international trade. The difference between RTAs and world trade organizations (WTO) is important. Studies of currency integration have appeared recently; however, most assume that currency integration varies the level of international trade between countries by making the proportion constant. This paper eliminates this socalled constant hypothesis and indicates that RTAs alters the slope of the relationship between countries and promote international trade. Empirical analysis indicates that the proportion is not constant. Also, this study shows that RTAs promote international trade more in OECD countries than in non-OECD countries.

Highlights

The GATT and world trade organizations (WTO) have been thought to ensure a level playing field of all, thereby contributing to economic growth and development
This study shows that Regional Trade Agreements (RTAs) promote international trade more in OECD countries than in non-OECD countries
Columns (1) and (4) in Table 1 show that the estimated coefficient for RTA is 0.815 (OECD) and 0.798

Summary

Introduction

The GATT and WTO have been thought to ensure a level playing field of all, thereby contributing to economic growth and development. The gravity model of international trade states that bilateral trade flows are based on the economic sizes (often using GDP) and distance between two units (countries). [3] stated that if trade encourages greater specialization in production, industry-specific shocks may cause members’ business cycles to diverge and that comparative advantages do not predict the relationships in the gravity model. [5] showed that the creation of RTAs provides trade preference to member countries to promote bilateral trade. [9] showed that a gravity model suggests that the creation of AFTA, COMESA, and MERCOSUR have increased trade in agriculture between their members. One of the reasons is that RTAs are recent phenomenon in the world In these cases, the slope of the bilateral trade-GDP relationship may change when RTAs are adopted.

Theoretical Analysis and Empirical Methodology

Estimated Results and Revised Estimation

Conclusions