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Preferential Trade Agreements and the Margins of Imports

Abstract

This paper considers the importance of Preferential Trade Agreements (PTAs) in enhancing trade for a large sample of countries within the period 1962–2000. The paper builds upon the existing literature by examining whether any significant effects of PTAs occur through a change in the variety of imports (i.e. the extensive margin) or through a change in the volume of existing products (the intensive margin). Our results indicate that imports respond positively to the formation of a PTA between countries, and that much of this increase in imports occurs along the extensive margin.

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Fig. 1

Notes

  1. 1.

    In the last two decades there has been a proliferation in the number of Preferential Trade Agreements (PTAs). According to Urata and Okabe (2007) the number of PTAs reported to the WTO was 25 in 1990, 91 in 2000 and 194 in 2007.

  2. 2.

    Hummels and Klenow (2005) for example decompose the exports of 126 countries into the contribution of the intensive and extensive margin and then relate each margin to country size (GDP) and its components (workers and GDP per worker). They find that the extensive margin accounts for about 60% of the greater exports of larger economies. Other examples include Schott (2004) who finds that richer countries export higher quality goods, and Funke and Ruhwedel (2002) who find a positive association between the variety of exports and total export volumes.

  3. 3.

    This number includes countries no longer in existence (e.g. Czechoslovakia, ex-Yugolslavia) along with the countries that replaced them (e.g. Czech Republic, Slovakia).

  4. 4.

    Early examples include Aitken (1973), Abrams (1980), Brada and Mendez (1983), Bergstrand (1985) and Frankel et al. (1995, 1996). More recent applications have looked to deal with the issue of endogeneity, examples including Baier and Bergstrand (2002), Magee (2003), and Baier et al (2008).

  5. 5.

    A recent exception is Feenstra and Kee (2008) who relate the variety of exports to country productivity. Their theoretical model relates to the recent literature on heterogeneous firms with firms self-selecting into exporting markets. Since more productive firms self-select into export markets and are thus more productive than the average domestic firm, an increase in the number of firms exporting and therefore an increase in export variety is associated with rising productivity.

  6. 6.

    Other approaches are discussed in Frankel (1997) and include the use of Tobit estimation or using (T ij +1) as the dependent variable. Both of these approaches are likely to lead to inconsistent estimates of the parameters however.

  7. 7.

    With such a large number of countries and time periods there are a large number of country-year dummies to include, making it difficult to estimate such a gravity model with the software and computing power available. As such, we proceed to construct for each country in our dataset a dummy variable for each five-year period, meaning that rather than include up to 39 dummies for each country, we include a maximum of eight.

  8. 8.

    While both approaches have come in for some criticism, the Santos-Silva and Tenreyro (2006) approach is slightly easier to implement. The approach of Helpman et al. (2008) has been criticised due to its heavy reliance on assumptions of normality and homoscedasticity (see Santos-Silva and Tenreyro 2006), while Martinez Zarzoso et al. (2007) find that the Poisson method proposed by Santos-Silva and Tenreyro (2006) suffers from a similar bias as other methods and is not always the ‘best’ model, though it is less affected by heteroscedasticity. Santos-Silva and Tenreyro (2008) point out that, of course, no single estimation technique is always likely to be the ‘best’, but maintain their Poisson estimator is likely to work well in a variety of circumstances. They are also highly critical of the approaches adopted by Martinez Zarzoso et al (2007) to compare models.

  9. 9.

    http://www.cepii.fr/anglaisgraph/bdd/distances.htm

  10. 10.

    http://rtais.wto.org/UI/PublicAllRTAList.aspx

  11. 11.

    The database is available at http://www.dartmouth.edu/~tradedb/trade_database.html. The reason for considering alternative sources is that the WTO dataset only includes PTAs in force, thus excluding a number of PTAs that are no longer in force, but that would have been in the period of interest, examples being the PTAs agreed between the EU-15 and Romania, Bulgaria and others in the 1990s, but which are no longer in force now that these countries are members of the EU.

  12. 12.

    Frensch (2010) defines a reference country that does not vary over time. This has the advantage that all variation across time in the extensive margin is due solely to variations in trade in the exporting country and not to variations in the reference country. As pointed out by a referee however, the measure suffers from the drawback that the extensive margin can increase over time solely because of inflation.

  13. 13.

    Computationally it was not feasible to include all importer-time and exporter-time fixed effects when using the Poisson-pseudo maximum likelihood estimator.

  14. 14.

    If we were to include an importer-time or exporter-time dummy for each year (rather than each five-year period) it would not be possible to estimate the coefficients on GDP or population because of perfect multicollinearity.

  15. 15.

    This is calculated as \( \left( {{e^{{{\beta_{{PTA}}}}}} - 1} \right) \).

  16. 16.

    The 11 PTAs are the Association of South East Asian Nations (ASEAN) Free Trade Area (AFTA), Australia-New Zealand Trade Agreement (ANZCERTA), Asian Pacific Economic Cooperation (APEC), Andean Pact (AP), Caribbean Community (CARICOM), European Economic Area (EEA), European Free Trade Agreement (EFTA), European Union (EU), Latin America Integration Agreement (LAIA), Southern Cone Common Market (MERCOSUR) and the North America Free Trade Agreement (NAFTA). We also considered the Central American Common Market (CACM), but since this agreement was finalised and implemented prior to the start of our sample it is not possible to estimate the coefficient on this variable when including country-pair fixed effects as in Table 4.

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Acknowledgement

The author would like to thank three anonymous referees and the editor, George Tavlas, for helpful comments. Any remaining errors remain the responsibility of the author.

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Correspondence to Neil Foster.

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Foster, N. Preferential Trade Agreements and the Margins of Imports. Open Econ Rev 23, 869–889 (2012). https://doi.org/10.1007/s11079-011-9213-5

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Keywords

  • Preferential trade agreements
  • Intensive and extensive margin
  • Gravity model

JEL

  • F10
  • F15