Trade creation and trade diversion in the EEC, the LAFTA and the CMEA: 1960-1994

Abstract

In a simplified version of the gravity model, appropriate dummy variables have been introduced to analyse the effects of both trade creation and trade diversion by three economic organizations, the European Economic Community (EEC), the Latin American Free Trade Association (LAFTA) and the Council of Mutual Economic Assistance (CMEA), for the period 1960-94. Five-year intervals are the main subject of measurement. The results show that both trade creation dummies and trade diversion dummies have statistically significant coefficients, which show the appropriateness of this new approach. The trade creation effect and trade diversion effect of each institution are proved to be generally weakening during the 1990s. It is also observed that each Organization has a distinctive international trade character. For Japanese trade, a similar approach is used to analyse nonaligned trade by Japan, with particular interest in the effects of these three institutions on trade with Japan. The result is that there is no strong evidence that the EEC and the LAFTA trade with Japan any more or less than the hypothetical level predicted by basic explanatory variables, while the CMEA increased its trade with Japan up to the hypothetical level during the analysis period.