Effects Of Free Trade Agreements Research Articles

Asymmetric Free Trade Agreements and Misalignment of Incentives: Lessons From the European Union–Turkey Customs Union

AbstractUnder the European Union (EU)–Turkey customs union, the EU can negotiate free trade agreements (FTAs) with third countries without Turkey's involvement. Simultaneously, Turkey is required to apply the same external tariffs and standards and negotiate its own FTAs in line with the EU. This leads to asymmetries and misalignment of incentives in Turkey's trade relationships. This study utilizes the peculiar nature of this arrangement to explore the asymmetric FTAs and their effects on Turkey and the Union. We find no effect of asymmetric FTAs on Turkish trade. This finding can be explained partially by evidence that Turkish compliance with EU tariffs is low for asymmetric FTAs. This is especially the case for the goods category in which Turkey specializes, and the divergence extends to at least 10 years after the EU signs an asymmetric FTA. As customs unions require that external trade policy be symmetric across all members for them to function optimally, this divergence in tariffs between Turkey and the EU needs to be addressed by removing the misalignment of incentives.

Trade, Gravity, and Aggregation

Abstract Gravity equations are an important tool in empirical international trade research. We study to what extent sector-level parameters can be recovered from aggregate gravity equations estimated via Poisson pseudo maximum likelihood. We show that in the leading case where trade cost regressors do not vary at the sector level, estimates obtained with aggregate data have a clear interpretation as a weighted average of sectoral elasticities. Otherwise the estimates are biased, but researchers may possibly infer the direction of the bias. We illustrate our results by revisiting Baier and Bergstrand’s (2007) influential study of the effects of free trade agreements.

Free Trade and Subnational Development: Economic Activity and Human Welfare

ABSTRACT This paper delves into the subnational relationship between free trade agreements (FTAs) and human development worldwide. Utilizing a difference-in-differences and an event-study approach with high-spatial-resolution land-cover data and a comprehensive time series of national-level FTA indicators for 207 countries, the study quantifies the effects of FTAs on subnational development. The findings indicate a small negative impact of FTAs on the Human Development Index but a notable positive impact on economic activity, with urbanized regions benefiting the most. Unequal and more vulnerable regions grapple with declining human development indicators. The depth of FTAs does not sway these outcomes. These patterns raise questions about the inclusivity and equitable distribution of the benefits of trade liberalization. While prior literature has examined the national implications of FTAs, this paper provides insight into the subnational repercussions of FTAs and emphasizes the role of inequality in hindering holistic developmental benefits from FTAs.

The effects of free trade agreements on the stock market: Evidence from Vietnam.

This study examines the effects of news events related to the European Union-Vietnam Free Trade Agreement (EVFTA) on the Vietnam stock market from 2010 to 2020. We calculate sectoral abnormal returns prior to, during, and after announcements and find that the Vietnamese stock market is susceptible to these events. We discovered that the announcement had a negative impact on the market, which might diminish the effectiveness of the Agreement. The findings show that more than half of Vietnam's sectors had an immediate reaction to EVFTA announcements, with fourteen reacting negatively and six responding positively. Two of the ten events did not have any immediate impact on these industries but all events resulted in either early or delayed reactions. We also find market scepticism and major changes in the deal led to the emergence of a diamond risk structure. We run multiple robustness tests to account for market integration and other factors that may affect stock returns. In addition, we explore potential sectoral systematic risk changes following these occurrences using different ARCH-type models. These additional tests confirm the robustness of our findings.

The effects of free trade agreements on product-level trade

We use highly disaggregated trade data to test whether “least traded products”–products either not traded previously or only traded in small amounts–experience faster trade growth after the signing of trade agreements and whether this is important for the aggregate trade creation effects of trade agreements. Because we use PPML, an estimator with unique aggregation properties, our product-level estimates are comparable to estimates based on aggregate trade data that are meant to capture aggregate trade creation effects. Using this approach, we find that virtually all of the trade creation associated with trade agreements comes from least traded products. Interestingly, for products that are very highly traded, we find that trade actually declines following an agreement. These results are robust to controlling for general mean reversion effects in the product-level trade data, which we also find evidence for, as well as for differences in observed tariff levels.

Export Diversification and Free Trade Agreements

This research paper examines the effect of Free Trade Agreements (FTAs) on export diversification, focusing on Peruvian exports to five countries in the Asia Pacific region: China, Japan, South Korea, Thailand, and Singapore. By employing regression models with control variables, the study investigates the outcomes of FTAs on export patterns. The findings reveal that the FTA yielded two primary effects: general and lagged. The general effect of the FTA was observed in the case of Peruvian exports to China and Korea, whereby a greater variety of exported goods became available. On the other hand, the FTA signed with Japan, Thailand, and Singapore resulted in a gradual reduction in the concentration of exported items over time. These findings underscore the importance of comprehending the multifaceted impacts of FTAs on export diversification and emphasize the need for a nuanced understanding of how trade agreements influence export dynamics across diverse markets.

The Effect of Turkey's Free Trade Agreements (FTAs) on Its External Trade: Counterfactual Impact Analysis

The study aims to estimate the impact of Turkey's FTAs on its average external trade level by three novel approaches, which are the fixed effects counterfactual estimator (FEct), interactive fixed effect counterfactual (IFEct) estimator, and matrix completion (MC) method introduced by Liu et al (2022). The results show that while Turkey's FTAs have a positive impact on Turkey's exports to the economies that Turkey has FTAs, we do not find any significant effect on its imports on average. The findings show that Turkey's FTAs has increased its exports to these economies by 54.7% on average over five years after the FTAs entered into force. Moreover, placebo test results signal that the impact of these agreements on Turkey's export might occur before the agreements entered into force. As far as we know, this is the first study considering the effects of FTAs on countries trade by counterfactual estimators introduced by Liu et al (2022).

Free Trade Agreement and Non-Tariff Measure on Indonesia’s Export Performance: Major Export Destination Countries

The study in this paper aims to estimate the effect of Free Trade Agreement (FTA) and Non-Tariff Measures (NTMs) on trade volume in Indonesia. The methodology used to determine the effect of the FTA and NTM is Fixed Effect Model (FEM) and Random Effect Model (REM) on a panel dataset from 2000 to 2020 in 10 main exports destination countries for Indonesia, and set four models to explain these effects. Models 2 to 4 which use the fulfillment of SPS, TBT and a combination of SPS and TBT as non-tariff barriers variables are found to have a negative and significant effect on Indonesia's export performance with resulting that SPS requirements by importing countries will be reduced by 5.7% (Model 2), TBT requirements by 6.02% (Model 3), and the combination of fulfilling SPS and TBT requirements 8.4% (Model 4) on Indonesia's export performance. In the REM model, RTA as a variable of FTA has a negative and significant impact on the value of Indonesia's exports with 3.8% effects. RTA policies with several countries such as Japan, Singapore and South Korea have not been effective in increasing Indonesia's exports for several periods. Meanwhile the trade between the USA and Indonesia without an FTA mechanism has actually increased the value of exports from 2003 to 2020. Furthermore, the implementation of meeting the requirements of non-tariff barriers could have a negative effect on Indonesia's export performance, and trade relations occur with four countries with the largest and negative intercept effect, namely Japan, followed by Singapore, USA and South Korea.

Trade Diversion and Creation Effect of Free Trade Agreements in ASEAN: Do Institutions Matter?

Trade Diversion and Creation Effect of Free Trade Agreements in ASEAN: Do Institutions Matter?

Impact of ASEAN Plus Five Free Trade Area: Trade Creation and Trade Diversion

One of the ways to reduce international trade barriers is through the Free Trade Area (FTA). Collectively, ASEAN already has five FTAs with trading partners outside Southeast Asia. This study intends to analyze the effect of free trade agreements between ASEAN and China, South Korea, Japan, India, and Australia – New Zealand (ASEAN+5 FTA). The implications of an FTA are explained using the concepts of trade creation and trade diversion through economic integration. The trade gravity model is expanded with three dummy variables to determine whether trade creation and trade diversion occur in the formation of each of these FTAs. Static panel data regression is used to analyze the effect of Free Trade Agreements on intra-regional trade flows, export flows to non-members, and import flows from non-FTA members. The fixed effect model is applied to overcome endogeneity problems, while the PPML estimator is chosen to get the best estimation results amid heteroscedasticity and zero trade flow problems that usually occur in trade flows. Estimation results show that the trade creation effect occurs only in ACFTA and AIFTA, while other FTAs harm member countries through trade diversion. Therefore, further evaluation and efforts regarding the use of FTAs are needed to achieve the goals of FTAs.

Empirical Analysis of Sustainable Trade Effects of FTAs Based on Augmented Gravity Model: A Case Study of China

China has developed many strategies to promote sustainable trade, including accelerating the signing of free-trade agreements (FTAs). However, there is a lack of studies examining the impact of FTAs on the sustainable growth of foreign trade from a holistic perspective. This paper applies an augmented gravity model to verify the trade creation and diversion effects of China’s FTAs that are currently in effect. A panel data analysis over the period of 1995–2019 is conducted on 34 countries and regions, including China, and Poisson pseudo-maximum likelihood (PPML) is employed to test three different fixed-effects models. The results show that the trade effects differ across FTAs, with nine FTAs generally making positive contributions to China’s trade and social welfare growth, and the remaining five FTAs exhibiting varying degrees of trade diversion or contraction effects. Empirically, it is clear that participation in FTAs has contributed to the sustainable trade of China, but China still needs to take prudent action to pursue further trade liberalization in order to counter the potential threat of trade diversion.

Evaluation of the Policy Effects of Free Trade Agreements: New Evidence from the Korea-China FTA

Purpose – The policy implications of free trade agreements have traditionally been a matter of debate among economists. The official signing of the Korea-China Free Trade Agreement provides economists with a quasi-natural experiment to analyze the FTA’s policy effects. This article aims to more accurately understand the impact of Korea’s FTA accession on the macro economy. Design/methodology – This study adopts the counterfactual method based on panel data to find common factors in the generation process of macro data to fit the counterfactual path, to accurately evaluate the effect of the macro policy. Findings – Our research results show that the signing of the Korea-China FTA has a relatively significant short-term positive effect on Korea's economic growth. On average, Korea’s real GDP growth rate has increased by 2.1%. This study finds evidence in support of FTA signing not having a significant impact on Korea’s GDP growth in the long run. Additionally, we evaluated the impact of the FTA on Korea’s imports and exports and found that it had a significant positive impact in the short term, but the trade effect of the FTA is significantly affected by the external macro-environment. Originality/value – First, this study uses macro panel data at the national level to examine the impact of the Korea-China FTA on Korea, and more accurately describes the policy effect of the FTA. Second, our empirical results show that the Korea-China FTA policy impact is subject to occasional changes in the external environment, such as the geopolitical conflict (crisis) between Korea and China, and the US-China trade war. Finally, the analysis shows that the short-term effect of FTA is significant but the long-term is uncertain, which provides empirical evidence for the debate on whether joining FTA can promote national economic growth.

The impact of FTAs on export duration: Evidence from China’s agricultural firms

A growing body of literature has emerged on the links between free trade agreement (FTA) and agricultural export margins. As a key component of intensive margins, export survival and duration play essential roles in long-term and sustainable export growth. We investigated the impact of FTAs on agricultural export duration from the perspective of firm-destination pair. Based on highly disaggregated firm-level panel data of Chinese agricultural exporters covering the period of 2000–2016, we applied the proper survival method to empirically analyze the effect of FTA on export duration and survival. The results identify dynamic export stylized facts among firm-destination country pairs: although most of the agricultural firm-destination export relations demonstrated longer duration than those of other industries in China, they were still short-lived. Most importantly, we confirmed that FTA produced two opposite effects: Compared to non-FTA partners, the FTA membership role helps extend the length of export duration for agricultural export relation in general. However, for newly created relations, the implementation of FTA increased the hazard rate of export failure and shortened the length of duration. Our results cast a new light on firm-level export survival issue and FTA policy, and provide implications for both agricultural exporters and policymakers.

Effects of Free Trade Agreements on Trade Activities of Signatory Countries

The study analyses the effects of free trade agreements (FTAs) signed by India on the changes in the trade volumes of member states. The article analyses the benefits of the economic integration of export earnings to meet the import demands. It is found that FTAs improve economic activities among the signing countries. This article highlights the role of FTAs in the economic activities of countries signing the trade agreement. Post FTAs, the compound annual growth rate (CAGR) of exports increased and imports reduced. This research will help researchers identify the areas and countries where FTAs are desirable and help improve economic activities. JEL Codes: F15

Do Japan’s Free Trade Agreements Increase Its International Trade?

This study analyzes the impacts of free trade agreements (FTAs) on bilateral trade, focusing on Japan’s FTAs. In particular, we examined both static and dynamic effects at the aggregated and disaggregated levels, using two datasets between 1995 and 2016 for Japanese trade only and world trade. For the static analysis, we investigated the overall impacts and the effect of individual FTAs. Regarding dynamic analysis, we considered the time since their enactment. Our results indicate that the impacts are heterogeneous among Japan’s FTAs and products, with a trade creation effect for some FTA partners. Moreover, our findings reveal that the trade creation effect is probably overestimated when trade between the third countries is not considered. We also found a positive dynamic effect for some products. Such a dynamic effect may emerge due to a longer time for firms to understand FTAs and learn their use and the gradual tariff reduction for some products.

Estimating the Impact of Cumulative Rules of Origin on Trade Costs: An Application to Mega-regional Free Trade Agreements in the Asia-Pacific Region

AbstractWe investigate the effects of free trade agreements (FTAs), focusing on the impact of cumulative rules of origin (ROO) on trade costs. Using a gravity regression model, we estimate the effect of various cumulative ROO systems on the measured trade costs. We apply these estimates to static and capital accumulation computable general equilibrium models to compare the effects of mega-regional FTAs in the Asia-Pacific region—namely, the Regional Comprehensive Economic Partnership (RCEP), Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), and Free Trade Areas in the Asia-Pacific (FTAAP). We find that mega-regional FTAs may not be a viable alternative to a multilateral trading system or bilateral FTAs unless less restrictive cumulative ROO are adopted. Successful FTAs depend on an appropriate cumulative ROO provision system rather than their membership expansion.

Agricultural trade liberalization and domestic fertilizer use: Evidence from China-ASEAN free trade agreement

The China-ASEAN (Association of Southeast Asian Nations) Free Trade Agreement (CAFTA) has been recognized as a significant progress in regional economic integration for member countries. While the existing literature has widely studied the trade effects of Free Trade Agreements (FTAs), it remains unclear how it affects environment-related input use. This paper examines the impacts of agricultural trade liberalization on the domestic fertilizer use following the CAFTA. Using a combined dataset consisting of country- and product-level fertilizer use and predictors over the period 1995–2015, this paper empirically examines the impact of CAFTA on the domestic fertilizer use for the exported fresh fruits and vegetables (FFV) from China to ASEAN members. We use the synthesis control method to identify the aggregate impacts of CAFTA on the domestic fertilizer use, followed by the propensity score matching difference-in-difference (PSM-DID) method to examine the mechanism through which fertilizer use is increased. We find that the total volumes of the domestic fertilizer use for Chinese exported FFV increased significantly following the implementation of the Early Harvest Program under CAFTA in 2004. This impact is more evident for exports to the initial ASEAN members compared to the new members. The PSM-DID results suggest that CAFTA increased the degree of export concentration on ASEAN members. The evidence is consistent with the export diversion effect of a customs union instead of the export creation effect due to trade liberalization.

The causal effect of free trade agreements on the trade margins: Product‐level evidence from geographically distant partners

AbstractWe estimate the causal effects of free trade agreements (FTAs) on the trade margins by focusing on recent agreements involving geographically distant partners. Using border‐sharing countries as controls, our product‐level difference‐in‐differences estimates reveal that FTAs had positive and significant effects, with the extensive margin accounting for around half of the export growth. In terms of timing, the intensive margin effects preceded those of the extensive margin. At the sectoral level, our results indicate that the extensive margin drove export growth in sectors with differentiated products, whereas export growth in sectors with homogeneous products was due to the intensive margin.

The effects of FTAs on the operation of the WTO: Reviews and recommendations

The primary goal of this article is to examine the positive and negative effects of free trade agreements (FTAs) on the World Trade Organization (WTO), highlighting that the current objective requirement is to reform the WTO’s operating mechanism and strengthen obligations to binding member states’ responsibilities when negotiating and signing new FTAs. This research employs comparative jurisprudence and written law analysis methods. This article is divided into four sections that address issues concerning FTAs and the WTO: 1) the history of FTAs; 2) the benefits and drawbacks of FTAs on international trade; 3) WTO members’ obligations when signing FTA, and 4) the need to reform the WTO’s current regime and what the WTO should do to control the “Spaghetti Bowl” phenomenon of FTA. The study’s findings suggest that FTAs are an inevitable trend in both the economic and political domains; FTAs should be regarded as WTO pluses; however, the WTO and its members must reform the current regulations governing the WTO’s power and member states’ obligations in negotiating and signing new FTAs. This paper will be highly useful to other scholars studying FTAs and the WTO in current global trade and the future development trend of FTAs.

Australia’s Free Trade Agreements (FTAs) and Potentiality of Wheat Exports: A Panel Gravity Model Approach

This paper estimates the trade creation and export diversion effects of different Australia’s free trade agreements (FTAs) using the panel data from 1996 to 2017. The heteroscedasticity robust Regression Error Specification Test confirms the relevance of Poisson Pseudo Maximum Likelihood estimator over Ordinary Least Square estimator. Results showed that the total trade creation effects of FTAs in wheat trade is higher than Intra block export diversion. The exhausted wheat exports potentiality from Australia to the countries like Indonesia, Iraq, Japan, Korea, and the Philippines has suggested seeking for additional potential markets based on demand in the future.