Effects Of Preferential Trade Agreements Research Articles

Exploring the Heterogeneous Impact of Trade Agreements on Trade: Depth Matters

Abstract One of the most relevant features in the context of international trade in recent decades is the increase in the depth of trade agreements. The aim of this article is to explore the heterogeneous effect of preferential trade agreements (PTAs) on bilateral trade flows including their depth in addition to other agreement characteristics such as the geographical scope of the member countries, their degree of development, or their nature. To measure depth, we follow the most recent works that propose indirect instead of direct measures. Once we control for depth, our results reveal that (i) the positive effect of regional PTAs is notably larger for deep agreements whereas the shallow interregional agreements do not seem to increase bilateral trade flows; (ii) North–North PTAs only boost trade when they exhibit a high depth level; and (iii) the depth is not a relevant factor for plurilateral agreements and those that consist of the adhesion of a country to an existent PTA.

Deep Trade Agreements and Firm Ownership in GVCs

Abstract This paper focuses on the effect of preferential trade agreements and their depth on firm-to-firm ownership, in particular, along global value chains. It measures shareholder–affiliate ownership links at the country-sector-pair level to distinguish between vertical and horizontal links. The findings show that preferential trade agreements boost vertical international investment links (both backward and forward) while reducing horizontal investment. Deep preferential trade agreements stimulate investment particularly for sector pairs, where a high input specificity prevails.

A re-assessment of the heterogeneous effect of trade agreements using intra-national trade flows

This paper aims to re-examine the effects on trade of the different types of trade agreements. The extant literature highlights the existence of sizeable different effects of preferential trade agreements (PTAs) on trade along the geographical scope of the member countries, their degree of development, or the nature of the agreements (bilateral, plurilateral...). However, all previous studies investigating these heterogeneous effects suffer from important limitations because they only rely on international trade flows (which is inconsistent with the theory of gravity in international trade), do not control for general globalization trends, and do not properly account for the dynamic adjustment of trade flows. We address all these shortcomings and find that: (i) both PTAs and GATT/WTO have had a positive effect on bilateral trade; (ii) regional PTAs have a significantly larger effect on bilateral trade than interregional PTAs; (iii) South–South PTAs show the biggest trade-enhancing impact; (iv) bilateral agreements do not boost trade; and (v) enlargements of existing PTAs have a larger effect than plurilateral agreements and the agreements between two PTAs or between a PTA and a country.

Evaluating the impact of preferential trade agreement on fishery imports: An application of difference‐in‐differences with matching method

AbstractThe purpose of thisstudy is to investigate the average treatment effect of the preferential tariff scheme at the HS 6‐digit level on the imports of fishery products between each OECD country and the world. The estimated results by employing a difference‐in‐differences with matching method show statistically positive average treatment effects for imports of frozen yellowfin tuna (HS030342) and fresh long‐finned tuna (HS030231) in many countries. However, there are also several negative average treatment effects on imports, implying that several OECD countries do not utilize preferential tariff schemes with exporter countries with sufficient productivity. This study fills the gap in the literature by providing more rigorous insights in the discussion regarding the trade creation/diversion effect of preferential trade agreements (PTAs).

The importance of heterogeneity in determining the effects of preferential trade agreements on Foreign Direct Investment

AbstractThis paper investigates the importance of PTA formation in attracting inflows of foreign direct investment (FDI). In particular, we examine the heterogeneous effects of different types of PTAs (FTAs or CUs) on the extensive and intensive margins of FDI and on how the interdependence among various PTAs may affect a country's ability to attract FDI inflows. We find that the larger the preferential markets to which a country has access, the larger the FDI inflows the country receives. Furthermore, we find that the type of PTA matters in determining FDI inflows. In this case, we find that the formation of CUs tends to promote more FDI inflows than the formation of FTAs. Our findings also indicate that the formation of PTAs significantly affects FDI through the intensive margin, rather than through the extensive margin. Importantly, notice that these effects are driven by the preferential markets to which a country has access and that have not established a PTA with the FDI‐originating (home) country, confirming that PTA interdependence matters in determining FDI inflows.

The WTO is not passé

Abstract The empirical literature on the effect of trade agreements has reached a consensus that WTO effects are insignificant or modest at best especially compared to the robust and strong positive effect of preferential trade agreements (PTAs) on bilateral trade (Rose, 2004; Eicher and Henn, 2011; Baier and Bergstrand, 2007, 2009). In this paper, we show that previous work that reports “average treatment effects” on trade flows fails to account for the heterogeneity in the effects of trade arrangements over time, leading to an underestimation of the WTO effect on bilateral trade. We present semi-parametric estimates of the impact of WTO membership, allowing for heterogeneity of WTO effects over time. We find evidence for strong WTO effects over time, with the WTO effects increasing almost monotonically with years of membership. In fact, in the long-term, the magnitude of the WTO effect exceeds those of the PTA effects. We also find that the strongest WTO effect over time is for destinations that are developing countries that underwent rigorous accession procedures to join the WTO. Disaggregating PTAs into bilateral, multilateral, and deep integration (customs union, common markets, and economic union), we find that the long-term effects of WTO membership dominate bilateral and multilateral PTAs but fall short of deep integration arrangements. Finally, we show that WTO membership increases both the extensive and intensive margins of trade over time, with a stronger impact on the former. Our results are consistent with gradual trade liberalization and declining trade policy uncertainty over time, following WTO membership.

Beyond trade creation: Preferential trade agreements and trade disputes

AbstractThis study investigates the effects of preferential trade agreements (PTA) on bilateral trade disputes. We construct a unique and comprehensive dataset on inter‐country trade disputes from 1995 to 2007. The dataset covers 110 countries and 1,162 bilateral country‐pair trade disputes. Using this dataset in a gravity‐type model of trade dispute analysis, we find that countries belonging to the same PTA tend to experience fewer trade conflicts among themselves than with non‐member countries. By studying various types of PTA with different dispute settlement mechanisms, we further find that the dispute‐reducing effect only comes from PTA with specific provisions on dispute settlement mechanisms. Moreover, the effect is stronger if those PTA explicitly stipulate that members can also resolve their disputes via the WTO Dispute Settlement Body. However, having PTA that do not address how members should resolve their disputes may lead to more dispute initiations than in cases without PTA.

The Effects of Preferential Trade Agreements on Foreign Direct Investment: Evidence from the African Caribbean Pacific Region

Our empirical analysis utilises panel data on bilateral FDI stocks from 34 OECD countries into 45 ACP countries over the period 2000–2017 to consider the role of PTAs in attracting FDI. We control for policies relating to trade, taxes and investment, along with other explanatory variables identified in the literature. We conclude the prevalence of market seeking FDI in the ACP region, with a role for regional integration in accessing surrounding market potential. We find no significant effect of PTAs on FDI in the Caribbean, while in Africa, the effects depend on the presence of a bilateral BIT.

Effect of preferential trade agreements on China’s energy trade from Chinese and exporters’ perspectives

PurposeChina is a major energy import powerhouse, its trade deals have significant impact on international energy trade and global energy markets. The purpose of this paper is to explore the role of energy in China’s preferential trade agreements (PTAs) and their impact on Chinese imports of oil, gas and coal.Design/methodology/approachAn extended trade gravity model framework is applied to explore the dynamics of China’s annualized energy import flows from the 22 economies that have PTAs with it for the period 1995–2015.FindingsThe effect of PTAs on trade patterns varies across the product groups and agreement clauses. The dominant factor affecting trade flows of coal, crude oil and oil products is the average tariff level. Its impact is less significant for gas imports, which are more affected by policy arrangements represented by a PTA variable. The depth and scope of a PTA do not affect Chinese energy imports patterns.Research limitations/implicationsThis paper is focused on exploring the effect of China’s trade and foreign relations strategies on its energy imports through the prism of its PTAs. Estimating the direct impact of China’s initiatives in the areas of trade, investment, security, culture, etc., on its trade flows of energy products and other product groups using the methodological framework proposed in this study would contribute to better understanding of the issue.Practical implicationsThe findings can assist both China and energy exporting countries that target Chinese market in better understanding the drivers of trade flows of energy products and design their PTA strategies accordingly.Originality/valueThis study applies the trade gravity model framework to assess the impact of specific components of preferential trade agreements – tariff reduction and depth and scope of agreement – on energy trade flows differentiated by product group.

The WTO Matters Strongly Over Time, But Unevenly Across Countries

The empirical literature on the effect of trade agreements has reached a consensus that WTO effects are insignificant or modest at best especially compared to the robust and strong positive effect of preferential trade agreements (PTAs) on bilateral trade (Rose, 2004; Eicher and Henn, 2011; Baier and Bergstrand, 2007, 2009). In this paper, we show that previous work that reports “average treatment effects” on trade flows fails to account for the heterogeneity in the effects of trade arrangements over time, leading to an underestimation of the WTO effect on bilateral trade. We present semi-parametric estimates of the impact of WTO membership, allowing for heterogeneity of WTO effects over time. We find evidence for strong WTO effects over time, with the WTO effects increasing almost monotonically with years of membership. In fact, in the long-term, the magnitude of the WTO effect exceeds those of the PTA effects. We also find that the strongest WTO effect over time is for destinations that are developing countries that underwent rigorous accession procedures to join the WTO. Disaggregating PTAs into bilateral, multilateral, and deep integration (customs union, common markets, and economic union), we find that the long-term effects of WTO membership dominate bilateral and multilateral PTAs but fall short of deep integration arrangements. Finally, we show that WTO membership increases both the extensive and intensive margins of trade over time, with a stronger impact on the former. Our results are consistent with gradual trade liberalization and declining trade policy uncertainty over time, following WTO membership.

It Is Much Bigger Than What We Thought: New Estimate of Trade Diversion

AbstractEstimates of the trade diversion (TD) effect of preferential trade agreements (PTAs) tend to be much smaller than that of the trade creation (TC) effect. This paper examines two sources of estimation bias of the TD effect. The first bias arises from the failure to recognise that the concept of TD is inapplicable for a substantial proportion of PTAs, and thus, previous studies wrongly count cases where trade cannot be diverted as cases where trade is not diverted. The second bias arises from the difficulty in controlling for multilateral resistance and other unobserved time‐varying country heterogeneity when estimating both TC and TD effects simultaneously due to perfect multicollinearity. This paper corrects these two biases using a new measure of TD which provides a better mapping between the concept and data characteristics. Removing the two sources of bias leads to a multifold increase in the estimate of the TD effect. It is found that the total TD effect is comparable to the TC effect in dollar terms.

Heterogeneous Effects of Preferential Trade Agreements: How does Partner Similarity Matter?

This paper examines how dissimilarity of partner country characteristics affects the change in trade flows under a preferential trade agreement (PTA). Our results show that the more similar the partner countries are, the larger the increase in intra-bloc trade is under a PTA. Particularly, there is a substantial “development neighborhood premium”: the gain for developing countries from a PTA among themselves is about two and a half times that from partnering with industrial countries. Our findings challenge the perception that by becoming more integrated with industrial countries, developing countries could automatically gain access to a much larger and lucrative export market.

The Early Effects of Preferential Trade Agreements on Intra-Regional Trade within ASEAN+6 Members

This study analyses the early effects of recent bilateral and regional Preferential Trade Agreements (PTAs) involving the ten-member Association of Southeast Asian Nations (ASEAN) grouping, as well as Australia, New Zealand, China, India, Japan and Korea. We utilize an augmented gravity model with this ASEAN+6 group of countries to examine the impact of membership in a bilateral versus a plurilateral PTA for the period of 1994 to 2006. The traditional gravity model is augmented by separately estimating the effects of bilateral memberships against plurilateral PTA memberships. Disaggregated country-by-country results indicate that plurilateral PTAs have had a more significant impact, relative to bilateral PTAs, in stimulating trade among the ASEAN+6 countries, in this initial period of new regionalism in Asia.

Trade Policy Determinants and Trade Reform in a Developing Country: The Case of Colombia

In this paper, I empirically examine trade policy determinants and trade reform in a developing country setting by using a political economy of trade policy model to guide my estimations for Colombia between 1983 and 1998. I introduce a novel approach to estimating the extra political weights placed by the government on the well-being of producers relative to average citizens. This is under the assumption that producers are organized in terms of trade policy while the public is not. I measure the impact of sectorial characteristics on tariffs indirectly through political weights as a novel alternative to nonstructurally estimating them as determinants of protection. Accordingly, I obtain more realistic estimates as compared to the earlier literature. I also show that it is important to control for the drastic unilateral trade reform shock that affects all sectors and I test the effect of preferential trade agreements (PTAs) on tariffs in the presence of such trade liberalization. I find that protection is higher in sectors that are important exports for preferential partners which may be seen as a slowing down effect of PTAs for Colombia. The estimations account for endogeneity and omitted variable bias concerns.

ARE PREFERENTIAL TRADE AGREEMENTS STUMBLING BLOCKS?

This paper studies the effect of preferential trade agreements (PTAs) on multilateral trading system using a sequential bargaining game. The study considers two formats of PTAs, i.e., when the PTA tariffs are specified before the formation of PTAs and when PTA members have to negotiate PTA tariffs after the formation of PTAs. The study finds that PTAs with specified tariffs can be building blocks to multilateral liberalization while PTAs without specified tariffs are stumbling blocks. The paper also concludes that PTAs can eliminate bargaining inefficiency called forward manipulation when PTA tariffs are specified before PTA negotiation.

Trade creation and diversion revisited: Accounting for model uncertainty and natural trading partner effects

SUMMARYThe effect of preferential trade agreements (PTAs) on trade flows is subject to model uncertainty stemming from the diverse and even contradictory effects suggested by the theoretical PTA literature. The existing empirical literature has produced remarkably disparate results and the wide variety of empirical approaches reflects the uncertainty about the ‘correct’ set of explanatory variables that ought to be included in the analysis. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian model averaging (BMA) to the PTA literature. Statistical theory shows that BMA successfully incorporates model uncertainty in linear regression analysis by minimizing the mean squared error, and by generating predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we find strong evidence of trade creation, trade diversion, and open bloc effects. Our results are robust to a range of alternative empirical specifications proposed by the recent PTA literature. Copyright © 2010 John Wiley & Sons, Ltd.

Beyond Trade: The Impact of Preferential Trade Agreements on FDI Inflows

This paper investigates the effects of preferential trade agreements (PTAs) on net FDI inflows of member countries using a comprehensive database of PTAs in a panel setting. PTA membership is associated with a positive change in net FDI inflows and FDI gains increase with the market size of PTA partners and their proximity to the host country. The estimated relationship is driven by the developing countries in the sample and agreements signed in the late 1990s–early 2000s, a period when the majority of “deep integration” PTAs have been advanced.

The effect of preferential trade agreements on monthly fruit exports to the European Union

This study assesses the effect of preferential trade agreements on monthly exports of fresh grapes, pears, apples, oranges and mandarins to the European Union (EU) during 2001--2004, using a gravity model. Preference margins are calculated to include quotas and the entry price system, and the model recognises that countries may have a choice among preferential schemes. The econometric methodology controls for heterogeneity, endogeneity and zero-trade flows. The effect of EU preferential policies is found to vary by commodity. The Generalised System of Preferences (GSP) seems to increase exports to the EU of fresh grapes only, while exports to the EU of oranges are favoured by the Cotonou Agreement. Regional trade agreements appear effective in expanding EU-bound exports from eligible countries for all fruits except oranges. Oxford University Press and Foundation for the European Review of Agricultural Economics 2011; all rights reserved. For permissions, please email journals.permissions@oup.com, Oxford University Press.

The impact of Preferential Trade Agreements on the margins of international trade

In this paper we consider the trade creating effects of Preferential Trade Agreements (PTAs) for a large sample of countries within the period 1962–2000. The paper builds upon existing literature by examining whether any significant effects of PTAs occur through a change in the variety of exports (the extensive margin) or through a change in the volume of existing products (the intensive margin). To address this issue we employ the commonly used gravity equation as well as a matching approach to deal with potential self-selection problems. Our results indicate that exports respond positively to the formation of a PTA between countries, and that much of this increase in exports occurs along the extensive margin. We also show that the extensive margin responds more strongly to the formation of a PTA in larger exporters and for larger country pairs.

Preferential trade agreements and their role in world trade

This paper investigates the effects of preferential trade agreements (PTAs) on bilateral trade using a comprehensive data base of PTAs in force and a detailed matrix of world trade. Total trade between PTA partners is a poor proxy for preferential trade (trade in tariff lines where preferences are likely to matter): while the former was one-third of global trade in 2000–2002, the latter was between one-sixth and one-tenth. Gravity model estimates indicate that using total trade to assess the impacts of PTAs leads to a significant downward bias in the PTA coefficient: the semi-elasticity of trade with respect to PTA membership rises from 87% for total trade to 119% for preferential trade. Product exclusions and long phase-in periods significantly limit preferential trade; the marginal impact of South-South agreements on preferential trade is much higher than North-South PTAs, while the effect of North-North agreements is insignificantly different from zero.