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Rev World Econ (2014) 150:443469 DOI 10.1007/s10290-014-0188-3
ORIGINAL PAPER
Tristan Kohl
Published online: 1 March 2014 Kiel Institute 2014
Abstract This study surveys the empirical literature in which the gravity equation has been used to study the effect of economic integration agreements (EIAs) on international trade ows. We show that most studies either focus on improving the methodology to assess regionalisms overall impact, or on a small set of well-known agreements without necessarily adopting new methodological improvements. We bridge this gap by providing individual estimates for EIAs on world trade, while employing rst-differencing techniques to correct for endogeneity bias and account for phase-in effects. Overall, EIAs promote trade by at most 50 %. Surprisingly, more than half of the EIAs investigated have had no discernible impact on trade at all, while only about one quarter of the agreements are trade promoting. Characteristics of these agreements, such as their institutional quality, design, and their members involvement in the World Trade Organisation, shed more light on how this variation can be understood.
Keywords Economic integration agreements Gravity model International
trade ows Endogenous trade policy
JEL Classication F13 F15 F5
1 Introduction
The global economy has witnessed a remarkable proliferation of economic integration agreements (EIAs) in the past two decades. In the empirical literature, which uses the gravity equation to model determinants of world trade, it is not
T. Kohl (&)
Faculty of Economics and Business, University of Groningen, P.O. Box. 800, 9700 AV Groningen, The Netherlandse-mail: [email protected]
Do we really know that trade agreements increase trade?
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uncommon to nd studies indicating that EIAs promote their members trade by as much as 420 % (see, e.g., Subramanian and Wei 2007). As the gravity equation has recently witnessed several improvements both to its theoretical foundation and empirical applications, the purpose of this study is to show how these developments, in turn, have important ramications for regionalisms estimated impact on international trade. Moreover, we identify three issues in the applied international trade literature that warrant further inspection.
First, the prevalent approach assumes that trade agreements bring about trade liberalisation that will change the amount of cross-border trade (henceforth called the EIA effect). But what if the reverse is true? If governments sign EIAs only after substantial...