Advertisement

Are all trade agreements equal? The role of distance in shaping the effect of economic integration agreements on trade flows

  • Rebecca Freeman
  • Samuel Pienknagura
Original Paper

Abstract

How does geographic distance affect the impact of trade agreements on bilateral exports, and through what channels? This paper examines these questions in a gravity model context for different types of goods for 185 countries over the period 1965–2010. Three stylized facts emerge. First, although economic integration agreements have a positive impact on trade flows, geographic distance significantly decreases their effect. Second, this phenomenon is in large part explained by the impact of economic integration agreements on intermediate goods. These results hold when controlling for trade agreement depth, measured by the type of agreement and content of provisions, and economic similarity among trading partners. Third, this paper finds either a smaller negative effect or no effect on the interaction between distance and economic integration agreements for non-intermediates. This underscores that while economic integration agreements promote trade in all goods, there is an additional benefit to intermediates which diminishes faster with distance.

Keywords

Trade agreements Integration agreements Geography Economic distance Gravity 

JEL Classification

F10 F11 F15 

References

  1. Anderson, J. E., & Van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. The American Economic Review, 93(1), 170–192.CrossRefGoogle Scholar
  2. Baier, S. L., & Bergstrand, J. H. (2007). Do free trade agreements actually increase members’ international trade? Journal of International Economics, 71(1), 72–95.CrossRefGoogle Scholar
  3. Baier, S. L., & Bergstrand, J. H. (2009). Bonus Vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation. Journal of International Economics, 77(1), 77–85.CrossRefGoogle Scholar
  4. Baier, S. L., Bergstrand, J. H., Egger, P., & McLaughlin, P. A. (2008). Do economic integration agreements actually work? Issues in understanding the causes and consequences of the growth of regionalism. The World Economy, 31(4), 461–497.CrossRefGoogle Scholar
  5. Baier, S. L., Bergstrand, J. H., & Feng, M. (2014). Economic integration agreements and the margins of international trade. Journal of International Economics, 93(2), 339–350.CrossRefGoogle Scholar
  6. Baier, S. L., Bergstrand, J. H., & Clance, M. W. (2018). Heterogeneous effects of economic iontegration agreements. Journal of Development Economics, forthcoming.Google Scholar
  7. Baldwin, R., & Taglioni, D. (2006). Gravity for dummies and dummies for gravity equations. National Bureau of Economic Research Working Paper 12516.Google Scholar
  8. Bergstrand, J. H., Larch, M., & Yotov, Y. V. (2015). Economic integration agreements, border effects, and distance elasticities in the gravity equation. European Economic Review, 78, 307–327.CrossRefGoogle Scholar
  9. Bernard, A. B., Jensen, J. B., Redding, S. J., & Schott, P. K. (2007). Firms in international trade. The Journal of Economic Perspectives, 21(3), 105–130.CrossRefGoogle Scholar
  10. Cameron, A. C., & Trivedi, P. K. (2005). Microeconometrics: Methods and Applications. Cambridge University Press.CrossRefGoogle Scholar
  11. Chaney, T. (2008). Distorted gravity: The intensive and extensive margins of international trade. The American Economic Review, 98(4), 1707–1721.CrossRefGoogle Scholar
  12. Cheong, J., Kwak, D. W., & Tang, K. K. (2015). Heterogeneous effects of preferential trade agreements: How does partner similarity matter? World Development, 66, 222–236.CrossRefGoogle Scholar
  13. Dhingra, S., Freeman, R., & Mavroeidi, E. (2018). Beyond tariff reductions: What extra boost from trade agreement provisions? LSE Centre for Economic Performance Discussion Paper 1532. Google Scholar
  14. Dür, A., Baccini, L., & Elsig, M. (2014). The design of international trade agreements: Introducing a new dataset. The Review of International Organizations, 9(3), 353–375.CrossRefGoogle Scholar
  15. Feenstra, R. C., Lipsey, R. E., Deng, H., Ma, A. C., & Mo, H. (2005). World trade flows: 1962–2000. National Bureau of Economic Research Working Paper 11040. Google Scholar
  16. Head, K., & Mayer, T. (2002). Illusory border effects: Distance mismeasurement inflates estimates of home bias in trade. CEPII Working Paper 2002-01. Google Scholar
  17. Head, K., & Mayer, T. (2014). Gravity equations: Workhorse, toolkit, and cookbook. In E. H. Gita Gopinath & K. Rogoff (Eds.), Volume 4 of Handbook of International Economics (pp. 131–195). Amsterdam: Elsevier.Google Scholar
  18. Hillberry, R., & Hummels, D. (2008). Trade responses to geographic frictions: A decomposition using micro-data. European Economic Review, 52(3), 527–550.CrossRefGoogle Scholar
  19. Hummels, D., & Klenow, P. J. (2005). The variety and quality of a nation’s exports. The American Economic Review, 95(3), 704–723.CrossRefGoogle Scholar
  20. Johnson, R. C., & Noguera, G. (2012). Proximity and production fragmentation. The American Economic Review, 102(3), 407–411.CrossRefGoogle Scholar
  21. Kohl, T., Brakman, S., & Garretsen, H. (2016). Do trade agreements stimulate international trade differently? Evidence from 296 trade agreements. The World Economy, 39(1), 97–131.CrossRefGoogle Scholar
  22. Krautheim, S. (2012). Heterogeneous firms, exporter networks and the effect of distance on international trade. Journal of International Economics, 87(1), 27–35.CrossRefGoogle Scholar
  23. Lake, J., & Yildiz, H. M. (2016). On the different geographic characteristics of free trade agreements and customs unions. Journal of International Economics, 103, 213–233.CrossRefGoogle Scholar
  24. Lawless, M. (2010). Deconstructing gravity: Trade costs and extensive and intensive margins. Canadian Journal of Economics, 43(4), 1149–1172.CrossRefGoogle Scholar
  25. Mattoo, A., Mulabdic, A. & Ruta, M. (2017). Trade creation and trade diversion in deep agreements. World Bank Working Paper 8206. Google Scholar
  26. Mayer, T., & Zignago, S. (2011). Notes on CEPII’s distances measures: The GeoDist database. CEPII Working Paper 2011-25. Google Scholar
  27. Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725.CrossRefGoogle Scholar
  28. Mulabdic, A., Osnago, A., & Ruta. M. (2017). Deep integration and UK-EU trade relations. World Bank Working Paper 7947. Google Scholar
  29. Orefice, G., & Rocha, N. (2014). Deep integration and production networks: An empirical analysis. The World Economy, 37(1), 106–136.CrossRefGoogle Scholar
  30. Redding, S. J. (2011). Theories of heterogeneous firms and trade. Annual Review of Economics, 3, 77–105.CrossRefGoogle Scholar
  31. Vicard, V. (2011). Determinants of successful regional trade agreements. Economics Letters, 111(3), 188–190.CrossRefGoogle Scholar

Copyright information

© Kiel Institute 2018

Authors and Affiliations

  1. 1.The Graduate Institute, Geneva (IHEID)GenevaSwitzerland
  2. 2.World Bank and CIEC-ESPOLWashingtonUSA

Personalised recommendations