Abstract
This paper uncovers new stylized facts on the relation between economic integration and world trade prices. Using export price data combined with data on 32 WTO (World Trade Organization) accessions by developing countries and hundreds of new PTAs (Preferential Trade Agreements), we show that a country’s membership in trade agreements is associated with an increase in export prices of differentiated goods. For WTO, this effect is captured by the developing countries that were subject to rigorous WTO accession procedures. We also exploit the importance of the depth of an PTA and of its different provisions. Whereas the effect of the depth per se is not significant, individual provisions evoke distinct effects on prices. In particular, we find that PTAs with provisions on investments are associated with higher export prices. The results are consistent with recent theoretical models that relate competition to the innovation behavior of firms.
Highlights
A large empirical literature has investigated the trade promoting effects of membership in the WTO and in PTAs.1 little is known about the effect of trade agreements on world trade prices.2 Membership in trade agreements lowers trade barriers on imported goods, which decreases export prices through a cost‐reducing effect
For the WTO, we show that the effect is captured by the countries that were subject to rigorous WTO accession procedures and not to accession under Article XXVI 5(c)
Despite the large interest and discussion concerning the trade promoting effects of membership in multilateral trade agreements, little is known about the effect of membership on world trade prices
Summary
A large empirical literature has investigated the trade promoting effects of membership in the WTO and in PTAs. little is known about the effect of trade agreements on world trade prices. Membership in trade agreements lowers trade barriers on imported goods, which decreases export prices through a cost‐reducing effect. This paper conducts a comprehensive analysis of world trade flows at the product level to investigate the reaction of export prices to membership in the WTO and/or in PTAs and highlights a mechanism to explain the results. Besides GATT/WTO membership, we investigate the price effect of membership in PTAs. The new Design of Trade Agreements (Desta) database constructed by Dür, Baccini, and Elsig (2014) provides information on PTAs. We include a dummy that indicates if a PTA exists as well as a depth measure. We show that the trade volume increases for all price categories following WTO membership This general result could be driven by a common time trend. According to the literature on quality upgrading as a response to a fall in tariffs (e.g., Fan et al, 2015), we expect the positive effect of trade_agreementij on prices to be driven by differentiated goods. Without correction, the error term would likely be heteroskedastic
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