Trade Diversion Effects Research Articles

Theoretical model of the Trade integration in the CiS region

The paper analyzes the main tenets of economic integration theory in order to reveal the features of the CIS regional integration and propose approaches of its theoretical model development. Quantitative methods have been used to assess the effects of creation and trade diversion, the relationship between bilateral exports, investment and technology exchange. It is established that the integration of the CIS deviates from the traditional model. At the lower stage it is accompanied by deepening cooperation in various sectors that have an effect on trade integration. Thus in contrast to the model of the European Union, it is a “non-linear” one. It is argued that the integration policy in the CIS region must be changed: more attention should be paid to the investment and trade agenda instead of trade.

Trade creation and diversion effects in the Mediterranean area: Econometric analysis by gravity model

Since the early 1990s, the world has seen a proliferation of free trade agreements (FTAs). A major goal of free trade is to develop trade between its signatories. The gravity model is used to analyze the bilateral trade data against the variables of the relative size of the pair of countries involved in trade, distance, common border and language and dummies for each of the FTAs. This article focuses on the studying of the influence of the FTAs in the Mediterranean countries in which we integrate the role of the regional dummy EU-15, Economic and Monetary Union (eurozone), the Arab Maghreb Union and AGADIR Agreement (FTA between Jordan, Egypt, Tunisia and Morocco) in trade flows. In addition, this work aims to detect the impact of the global financial crisis on export flows between the FTAs in the Mediterranean region. The use of regional variables in gravity models designed to determine whether the FTAs contribute to the creation or trade diversion. This study examines a cross section and panel (static and dynamic) of 27 countries for 1980–2011. The results show the existence of a strong relationship between the factors of FTAs and trade flows.

Going Deep: The Trade and Welfare Effects of TTIP

Since July 2013, the EU and the US have been negotiating a preferential trade agreement (PTA), the Transatlantic Trade and Investment Partnership (TTIP). We use a multi-country, multi-industry Ricardian trade model with national and international input-output linkages to quantify its potential economic consequences. We structurally estimate the sectoral trade flow elasticities of trade costs and of existing PTAs. We simulate the trade, value added, and welfare effects of the TTIP, assuming that the agreement would eliminate all transatlantic tariffs and reduce non-tariff barriers as other deep PTAs have. The long-run level of real per capita income would change by 2.12% in the EU, by 2.68% in the US, and by -0.03% in the rest of the world relative to the status quo. However, there is substantial heterogeneity across the 134 geographical entities that we investigate. Gross value of EU-US trade could triple, but its value added would grow by substantially less. Moreover, trade diversion effects are more pronounced in value added trade than in gross trade. This signals a deepening of the transatlantic value chain.

The development and significance of foreign trade in agri-food products in selected preferential trade agreements

The aim of the paper is to present the development tendencies and the significance of agri-food trade in selected preferential trade agreements in both Americas, Asia and Africa. The analysis included the values of trade turnover both within the region and in exchange with third countries, the share of the agri-food trade in the total trade in the region and the share of the regions under investigation in the global agri-food trade. The analysis allowed us to indicate the greatest global exporters and importers of agri-food products. The assessment of trade creation and trade diversion effect in agri-food trade of selected trade agreements was also possible.

On the trade-diversion effects of free trade agreements

Trade-diversion effects of free trade agreements (FTAs) have not been thoroughly examined empirically. Using a novel empirical approach, we confirm that FTAs divert trade away from non-member countries and even more so from internal trade (domestic sales) in member countries.

An Introduction to Alternative Experimental Models in Monitoring Economic Failures

This paper proposes four alternative experimental models in monitoring economic failure such as the national production function (NP-Function), the trade creation and trade diversion effect under the application of multi-level analytical framework, the mega-economics structures vulnerability analysis (MSV-Analysis), and the mega-economic surface interactive system. All these four alternative experimental models are based on the uses of Econographicology. The main objective to propose these four models in economics is to analyze different macroeconomics scenarios simultaneously to monitoring and alerting possible unexpected economic failure(s) under the uses of a new mathematical frameworks and the application of multidimensional graphs.

Effects of trade diversion and trade creation of MERCOSUR on US and world apple markets

Apples are the third most valuable fruit in the United States and account for 18% of US fruit exports. Chile is a major competitor to the United States in the MERCOSUR market, since it is one of the leading apple producing countries and enjoys the tariff reductions as a member of MERCOSUR. Consequently, Chilean exports displace US exports in MERCOSUR. In addition, other MERCOSUR members import more from lower-cost Chile, leading to a reduction in production and an increase in consumption in these countries. This study develops a theoretical and an empirical model of world apple market to quantify the trade diversion and trade creation effects of the MERCOSUR free trade agreement and to estimate the welfare impacts.

The EU-CARIFORUM Economic Partnership Agreement (EPA)

Purpose – The entry into force of the EU-CARIFORUM Economic Partnership Agreement (EPA) marks the beginning of a new era of trade relations, from preferential treatment to reciprocity, between the member states of the European Union (EU) and the Caribbean Forum (CARIFORUM) of African, Caribbean and Pacific (ACP) states. In light of the controversy regarding the impact of the agreement, an assessment is made on the static welfare impact it is likely to generate on consumers in Guyana. Design/methodology/approach – The assessment is done through the application of a partial equilibrium model to the 2008 import and tariff data of Guyana. The model captures the static welfare effect that will be occasioned by a change in tariff on imports. Findings – The study finds that there will be a static net welfare loss to the tune of US$31.01 million or 2.2 percent of Guyana's GDP obtained for 2008. The loss is due to a large trade diversion effect which is the product of the fact that over the years Guyana imported l...

Trade Effects of European Economic Integration - A Comparison between Austria, Slovenia, and Bosnia and Herzegovina

Over the past ten years, the Central and Eastern European Countries have considerably increased their share in world trade as well as in the imports of the 15 old EU member states. The accession to the EU brings about trade creation and trade diversion effects. In the case of Austria, after EU accession trade with the other EU member states has grown, while Switzerland has become less important. Also for Slovenia, trade with the EU countries has become increasingly important. This can also be expected for Bosnia and Herzegovina, which is striving for EU membership. In addition to the regional dimension, the sectoral pattern of exports and imports is also affected by EU membership. This paper presents theoretical consideration about the effects of EU accession on international trade. In addition, some stylised facts on the regional and sectoral structure of exports and imports of Austria, Slovenia and Bosnia and Herzegovina are presented. Austria and especially Slovenia can be regarded as benchmark countries for the future development of international trade of Bosnia and Herzegovina.

Quantifying the Economic Effects of an EU-Japan Free Trade Agreement

The European Union and Japan have recently launched negotiations about a bilateral free trade agreement as means of economic stimulation, with trade as a driving force to create growth and wealth. Since customs duties are already low, the success of the liberalization process hinges on the potential elimination of non-tariff barriers. The purpose of this paper is to shed light on two possible liberalization scenarios, a less ambitious and a comprehensive trade liberalization. In contrast to classical studies our paper builds on the modern trade literature, accounting for the dominance of intra-industry trade between the two economies and the existence of heterogeneous firms. Furthermore, we model a search-and-matching labor market allowing us to quantify employment effects of trade liberalization. We find that a comprehensive liberalization increases Japanese GDP by 0.86 per cent, whereas the EU only experiences an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms’ efficiency gains, while unemployment is only reduced by a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.

The United States–Korea Free Trade Agreement (KORUS) and Its Impacts on China’s Textile and Apparel Exports to the United States

This study is an empirical evaluation of the impact of the U.S.-Korea Free Trade Agreement (KORUS) on China's textile and apparel (T&A) exports to the United States, with special focus on potential trade diversion effects of the agreement. On the basis of estimated export similarity index and trade elasticity of substitution values for T&A products of China and South Korea, trade diversion caused by the KORUS is predicted to most strongly affect China's apparel exports (in HS Chapters 60-63). The KORUS may also affect China's exports in other T&A categories (in HS Chapters 51, 52, 56, 57 and 59), but results suggest the effects will be limited. This study contributes to understanding the T&A-specific sectoral impacts of the KORUS and suggests a need to reconsider the competitiveness of China's T&A exports in the era following elimination in 2005 of Multi-Fiber Arrangement quantitative trade restrictions.

Fair, optimal or detrimental? Environmental vs. strategic use of border carbon adjustment

We carry out a detailed sensitivity analysis of border carbon adjustment (rates) by applying a global computable general equilibrium (CGE) GTAP7-based model. We find different incentives for the regions in the climate coalition to raise carbon-based border tax rates (BTAX) above the standard rate that mimics an equalisation of carbon prices across regions. Herein, the strategic use of BTAX (the manipulation of the terms of trade) is stronger for all coalition regions than the environmental use (the reduction of carbon emissions abroad). Higher BTAX can reduce carbon leakage but with a declining marginal effect. Furthermore, we find different incentives for regions outside the coalition to oppose high BTAX rates: Russia and the other energy exporters would oppose it, while the low-income countries would not because of benefits from the trade diversion effect. Thus, BTAX encourages the former to join the coalition, while compensating transfers are necessary to encourage the other (developing) countries including China and India.

MERCOSUR enlargement: predicting the effects on trade in primary agricultural commodities

This article estimates the effects of a hypothetical enlargement of the Mercado Comun del Sur (MERCOSUR), depicted by granting MERCOSUR associate member countries a full membership status, on trade in primary agricultural commodities. The empirical investigation is implemented through the multiplicative form of the gravity model. The estimated gravity parameters are used to carry out scenarios that predict the effects of MERCOSUR enlargement on trade in primary agricultural commodities. The predictions reveal that MERCOSUR enlargement would generate significant increases in exports from the full members to the associate members. The predictions also show relatively smaller increases in exports from the associate members to the full members (in value terms), but some important increases in trade among the associate members. Trade diversion effects of MERCOSUR enlargement, which influence trade between full members and from non-member countries to full and associate members, are found to be limited.

Assessment of the Impact of Avian Influenza–related Regulatory Policies on Poultry Meat Trade and Welfare

AbstractA Heckman‐type gravity model is used to estimate the trade impact of avian influenza–related quarantine ex post measures. An accompanying spatial partial equilibrium simulation model is developed to simulate related welfare changes. The simulation model considers spread and transmission risk according to the disease status of both importers and exporters. The econometric results show that the principle of regionalisation is preferred to import trade bans for uncooked meat. The simulation results verify the negative welfare impact of currently implemented quarantine policies and indicate that significant trade diversion effects occur according to the disease status of countries. A trade ban is a costly measure to address the infection risk resulting from the spread of the avian influenza virus.

Econometric Analysis of the India–Sri Lanka Free Trade Agreement*

This paper investigates whether the India–Sri Lanka Free Trade Agreement (ISLFTA) has had trade creation or trade diversion effects on the rest of the world. Using data on tariffs at the six‐digit level of the Harmonized System classification for the period 1996 to 2006, the methodology of the present paper follows a study on the North American Free Trade Agreement by Romalis (2005) We use the commodity and time variation in the tariff preferences allowed under ISLFTA to identify its effect on sourcing of different products from the ‘control country’ to the ISLFTA region. Using a fixed effects model, we find that the ISLFTA has had small trade creation effects in the control countries.

Impact of Environmental Regulations on Trade in the Main EU Countries: Conflict or Synergy?

AbstractIn an increasingly integrated world with declining trade barriers, environmental regulations can have a decisive role in shaping countries’ comparative advantages. The conventional wisdom about environmental protection is that it comes at an additional cost on firms imposed by the government, which may erode their global competitiveness. However, this paradigm has been challenged by some analysts. In particular, Porter and van der Linde argue that pollution is often associated with a waste of resources and that more stringent environmental policies can stimulate innovations that may overcompensate for the costs of complying with these policies. This is known as the Porter hypothesis. While there is a broad empirical literature on the impact of trade on environment, the empirical literature on the impact of environmental regulations on trade flows is relatively scarce, very heterogeneous and presents mixed results. The innovative feature of this paper is its attempts to estimate, in a gravity setting, augmented with a proxi of environmental stringency, the impact of three major multilateral environmental agreements (MEAs) on 15 EU countries’ bilateral exports. According to our estimates, in the period 1988–2008, to be member of MEAs had a positive average impact on EU‐15 bilateral exports. This evidence can be partly explained by a possible trade diversion effect with respect to countries that did not sign MEAs and a corresponding trade creation effect among members of the environmental agreements. Furthermore, evidence coming from interaction effects estimates seems to show that for exporting countries, having signed the United Nations Framework Convention on Climate Change and the Montreal agreements partly mitigates (by the amount of the estimated coefficient) the negative impact of having a relatively more stringent environmental regulation on bilateral trade. This result could have important policy implications for the future international trade–environmental negotiations.

Goods Follow Bytes: The Impact of ICT on EU Trade

This paper empirically assesses whether the deployment and use of Information and Communication Technology (ICT) infrastructure at the national level affects trade flows within the European Union (EU) and between the EU and its main trading partners. The analysis tests the hypothesis that availability and use of ICT enhances trade by reducing transaction costs and through network effects that materialize when both trading partners are advanced users of ICT. The empirical analysis is based on the application of gravity equations in various robust specifications. The results suggest that ICT does have a significant impact on EU trade. In particular, we find trade to be enhanced if both trading partners reveal advanced ICT endowments, which supports the expected network effects. Additionally, we observe trade diversion effects from less to highly ICT developed countries.

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.

The trade destruction effect and trade diversion effect of RMB appreciation

This paper examines how Chinese RMB appreciation affects China and its competitor’s exports to the third market at industry level. We develop a two-country competition model to analyze the trade destruction effect and trade diversion effect of RMB appreciation. The theoretical analysis shows that the appreciation of RMB has negative impacts on China’s exports and positive impacts on its competitor’s exports. We then empirically test how the appreciation of RMB to the US dollar affects China’s and India’s textiles and apparel exports to the US from 1995Q1 to 2008Q4. The empirical results show that an 1% appreciation of RMB to US dollar will reduce China’s exports of textiles & apparel to the U.S. by 2.63% and raise the India’s exports of textiles & apparel to the U.S. by 2.71%.

Assessing the implications of regional preferential market access for meat commodities

The authors derive a gravity framework that is compatible with the existence of reference prices for agricultural commodities. A commodity-specific gravity equation, estimated with Poisson pseudo-maximum likelihood and threshold Tobit estimators, is used to investigate the effects of regional trade preferences for meat commodities. The predictions indicate that European Union (EU) tariff-free access and North American Free Trade Agreement (NAFTA) nontariff provisions are the main types of preferences that substantially promoted intraregional trade. In addition, the trade creation effects of the Mercado Comun del Sur (MERCOSUR) and Andean Community of Nations (ANDEAN) are generally the result of nontariff preferences. Moderate trade diversion effects occurred in the case of the EU, NAFTA, and MERCOSUR. [Econ Lit classification: F14, F15, Q17]. © 2011 Wiley Periodicals, Inc.