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On trade creation and regional trade agreements: does depth matter?

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Abstract

Regional trade agreements (RTAs) are usually classified according to their form into four broad categories: preferential arrangements, free trade agreements, customs unions and common markets. This paper investigates whether the form/depth of RTAs matters concerning their effect on trade. I use a proper specification of the gravity model with panel data on the 1960–2000 period, which specifically control for self-selection into agreements. Results show that creating any kind of RTAs providing trade preferences to their member countries significantly increases bilateral trade. Nevertheless, their average treatment effect on bilateral trade does not significantly differ according to the depth of agreements.

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Notes

  1. For instance, Krueger (1997) argues that a free trade area cannot be more trade creating than a customs union because the former entails the implementation of rules of origin.

  2. For instance, the arrangements governing foreign investments under the NAFTA allow for a great mobility of capital.

  3. The focus of this paper is on reciprocal agreements on trade in goods, so these figures do not include non-reciprocal arrangements like Generalized System of Preferences (GSP), as well as service agreements notified under the General Agreement on Trade in Services (GATS) article V.

  4. Fiorentino et al. (2007) moreover underline that planed RTAs are mostly bilateral FTAs.

  5. Baier and Bergstrand (2007) review alternative methods to deal with this endogeneity bias. In particular, instrumental-variable estimation and Heckman’s control function approach fail to solve the endogeneity issue.

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

  7. A political agreement is defined as an organization aiming at liberalizing trade among its members but falling short of providing for tariff preferences inherent in a CM, CU, FTA or PA, such as the Generalized System of Preferences or the Everything but Arms regulation adopted by the European Union, which provide preferential or even duty free access to least developed or developing countries on a non reciprocal basis, are not considered in this paper.

  8. Data are assembled from notifications to the WTO (http://www.wto.org/english/tratop_e/region_e/region_e.htm), Foroutan (1993, 1998), Langhammer and Hiemenz (1990), Frankel (1997), Machlup (1977) and other public sources.

  9. Results remain qualitatively similar when the coefficient on GDPs is constrained to 1, i.e. when the dependent variable is replaced by \( \ln T_{ijt} = \left( {\ln \frac{{{\text{imp}}_{ijt} }}{{{\text{GDP}}_{it} {\text{GDP}}_{jt} }} + \ln \frac{{{\text{imp}}_{jit} }}{{{\text{GDP}}_{it} {\text{GDP}}_{jt} }}} \right)\bigg{/}2 \).

  10. http://dss.ucsd.edu/~egartzke/.

  11. http://cow2.la.psu.edu/.

  12. Estimating the baseline model on this restricted sample yields the same results.

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Acknowledgments

I thank Harmen Lehment, Thierry Mayer and an anonymous referee. I also thank Jeffrey Bergstrand for helpful suggestions on an earlier version of this paper.

Author information

Authors and Affiliations

  1. Paris School of Economics, University Paris I Panthéon-Sorbonne and University Paris-Dauphine, Paris, France

    Vincent Vicard

  2. Centre d’economie de la Sorbonne, 106-112, Bd de 1’hôpital, 75647, Paris Cedex 13, France

    Vincent Vicard

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Correspondence to Vincent Vicard.

Appendix: Regional trade agreements (1960–2000)

Appendix: Regional trade agreements (1960–2000)

Name

Official dates

Actual dates (5-year intervals)

Common markets

 Benelux

1961

(1965–2000)

 European Union (EU)

1992

(1995–2000)

Customs unions

 Eurasian Economic Community

1997

(2000–2000)

 Equatorial Customs Union

1959–1965

(1960–1965)

 Economic and Monetary Community of Central Africa

1994

(1995–2000)

 Mano River Union

1973

(1975–2000)

 Customs Union of West African States

1960–1966

(1960–1965)

 West African Economic and Monetary Union

1998

(2000–2000)

 East African Community

1967–1977

(1970–1975)

 Benelux

1947–1960

(1960–1960)

 European Communities (EC)

1958–1991

(1960–1990)

 Customs Union EU-Malta

1971

(1975–2000)

 Customs Union EU-Cyprus

1973

(1975–2000)

 Customs Union EU-Turkey

1996

(2000–2000)

 Customs Union Czech Republic-Slovakia

1993

(1995–2000)

 Southern Common Market (MERCOSUR)

1991

(1995–2000)

 Central American Common Market (CACM)

1993

(1995–2000)

 Andean Customs Uniona

1995

(1995–2000)

 Caribbean Community and Common Market (CARICOM)

1973

(1975–2000)

Free trade agreements

 Closer Trade Relations Trade Agreement

1983

(1985–2000)

 Commonwealth of Independent States

1995

(1995–2000)

 Papua New Guinea and Australia Trade and Commercial Relation Agreement

1977

(1980–2000)

 Baltic Free Trade Area

1994

(1995–2000)

 Central European Free Trade Agreement

1993

(1995–2000)

 European Economic Area

1994

(1995–2000)

 European Free Trade Agreement (EFTA)

1960

(1960–2000)

 Group of Three

1995

(1995–2000)

 North American Free Trade Agreement (NAFTA)

1994

(1995–2000)

 South African Development Community

2000

(2000–2000)

 Central American Common Market

1961–1975

(1965–1975)

 Andean Free Trade Areaa

1993

(2000–2000)a

 Caribbean Free Trade Area

1968–1972

(1970–1970)

 Armenia-Moldova

1995

(1995–2000)

 Armenia-Russia

1993

(1995–2000)

 Armenia-Turkmenistan

1996

(2000–2000)

 Armenia-Ukraine

1996

(2000–2000)

 Bulgaria-Turkey

1999

(2000–2000)

 Canada-Chile

1997

(2000–2000)

 Canada-Israel

1997

(2000–2000)

 CARICOM-Dominican Republic

1998

(2000–2000)

 Czech Republic-Estonia

1998

(2000–2000)

 Czech Republic-Israel

1997

(2000–2000)

 Czech Republic-Latvia

1997

(2000–2000)

 Czech Republic-Lithuania

1997

(2000–2000)

 Czech Republic-Turkey

1998

(2000–2000)

 EU-Algeria

1998

(2000–2000)

 EU-Bulgaria

1994

(1995–2000)

 EU-Czech Republic

1992

(1995–2000)

 EU-Egypt

1977

(1995–2000)

 EU-Estonia

1995

(1995–2000)

 EU-Hungary

1992

(1995–2000)

 EU-Israel

2000

(2000–2000)

 EU-Latvia

1995

(1995–2000)

 EU-Lithuania

1995

(1995–2000)

 EU-Morocco

2000

(2000–2000)

 EU-Norway

1973–1993

(1975–1990)

 EU-Poland

1992

(1995–2000)

 EU-Romania

1993

(1995–2000)

 EU-Slovakia

1992

(1995–2000)

 EU-Slovenia

1997

(2000–2000)

 EU-South Africa

2000

(2000–2000)

 EU-Switzerland

1973

(1975–2000)

 EU-Syria

1977

(1980–2000)

 EU-Tunisia

1998

(2000–2000)

 EFTA-Bulgaria

1993

(1995–2000)

 EFTA-Czech Republic

1992

(1995–2000)

 EFTA-Estonia

1996

(2000–2000)

 EFTA-Hungary

1993

(1995–2000)

 EFTA-Israel

1993

(1995–2000)

 EFTA-Latvia

1996

(2000–2000)

 EFTA-Lithuania

1996

(2000–2000)

 EFTA-Morocco

1999

(2000–2000)

 EFTA-Poland

1993

(1995–2000)

 EFTA-Romania

1993

(1995–2000)

 EFTA-Slovakia

1992

(1995–2000)

 EFTA-Slovenia

1995

(1995–2000)

 EFTA-Turkey

1992

(1995–2000)

 Estonia-Turkey

1998

(2000–2000)

 Estonia-Ukraine

1996

(2000–2000)

 Georgia-Armenia

1998

(2000–2000)

 Georgia-Azerbaijan

1996

(2000–2000)

 Georgia-Kazakhstan

1999

(2000–2000)

 Georgia-Russia

1994

(1995–2000)

 Georgia-Turkmenistan

2000

(2000–2000)

 Georgia-Ukraine

1996

(2000–2000)

 Hungary-Israel

1998

(2000–2000)

 Hungary-Latvia

2000

(2000–2000)

 Hungary-Lithuania

2000

(2000–2000)

 Hungary-Turkey

1998

(2000–2000)

 Kyrgyzstan-Armenia

1995

(1995–2000)

 Kyrgyzstan-Kazakhstan

1995

(1995–2000)

 Kyrgyzstan-Moldova

1996

(2000–2000)

 Kyrgyzstan-Russia

1993

(1995–2000)

 Kyrgyzstan-Ukraine

1998

(2000–2000)

 Kyrgyzstan-Uzbekistan

1998

(2000–2000)

 Latvia-Turkey

2000

(2000–2000)

 Lithuania-Turkey

1998

(2000–2000)

 MERCOSUR-Chile

1996

(2000–2000)

 MERCOSUR-Bolivia

1996

(2000–2000)

 Mexico-Israel

2000

(2000–2000)

 Mexico-Costa Rica

1995

(1995–2000)

 Mexico-Bolivia

1995

(1995–2000)

 Mexico-Nicaragua

1998

(2000–2000)

 Poland-Israel

1998

(2000–2000)

 Poland-Latvia

1999

(2000–2000)

 Poland-Lithuania

1997

(2000–2000)

 Poland-Turkey

2000

(2000–2000)

 Romania-Turkey

1998

(2000–2000)

 Slovakia-Estonia

1998

(2000–2000)

 Slovakia-Israel

1997

(2000–2000)

 Slovakia-Latvia

1997

(2000–2000)

 Slovakia-Lithuania

1997

(2000–2000)

 Slovakia-Turkey

1998

(2000–2000)

 Slovenia-Estonia

1997

(2000–2000)

 Slovenia-Israel

1998

(2000–2000)

 Slovenia-Latvia

1996

(2000–2000)

 Slovenia-Lithuania

1997

(2000–2000)

 United States of America-Israel

1985

(1985–2000)

 United States of America-Canada

1989–1993

(1990–1990)

 India-Bhutan

1995

(1995–2000)

 India-Nepal

1996

(2000–2000)

 India-Sri Lanka

1998

(2000–2000)

Preferential arrangements

 Protocol Relating to Trade Negotiations among Developing Countries (PTN)

1973

(1975–2000)

 Global System of Trade Preferences among Developing Countries (GSTP)

1989

(1990–2000)

 Tripartite agreement

1968

(1970–2000)

 Economic Cooperation Organization

1992

(1995–2000)

 Gulf Cooperation Council (GCC)

1984

(1985–2000)

 South Pacific Regional Trade and Economic Cooperation Agreement

1981

(1985–2000)

 Melanesian Spearhead Group

1993

(1995–2000)

 Council for Mutual Economic Assistance

1949–1990

(1960–1990)

 ASEAN Free Trade Agreement

1992

(1995–2000)

 Bangkok Agreement

1976

(1980–2000)

 South Asian Preferential Trade Agreement

1995

(1995–2000)

 West African Economic Community

1973–1997

(1975–1995)

 Common Market for Eastern and Southern Africa

1994

(1995–2000)

 East African Cooperation

2000

(2000–2000)

 Latin American Free Trade Association

1961–1980

(1965–1980)

 Latin American Integration Association

1993

(1995–2000)

 Andean Communitya

1988–1997

(1990–1995)a

 CARICOM-Colombia

1995

(1995–2000)

 CARICOM-Venezuela

1993

(1995–2000)

 Laos-Thailand

1991

(1995–2000)

 Chile-Peru

1998

(2000–2000)

 Chile-Bolivia

1993

(1995–2000)

 Chile-Colombia

1994

(1995–2000)

 Chile-Venezuela

1993

(1995–2000)

Political agreements

 Regional Cooperation for Development

1965–1979

(1965–1975)

 Arab Maghreb Union

1989

(1990–2000)

 South African Development Coordination Conference (SADC)

1980–1999

(1980–1995)

 Cross Border Initiative

1990

(1990–2000)

 Association of South East Asian Nations

1967

(1970–2000)

 South Asian Association for Regional Cooperation

1985

(1985–2000)

 Asian Pacific Cooperation

1989

(1990–2000)

  1. Source: WTO (http://www.wto.org/english/tratop_e/region_e/region_e.htm), Foroutan (1993, 1998), Langhammer and Hiemenz (1990), Frankel (1997), Machlup (1977) and other public sources
  2. aPeru entered the Andean Free Trade Area only in 1997, and did not join the Andean Customs Union until 2004

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Vicard, V. On trade creation and regional trade agreements: does depth matter?. Rev World Econ 145, 167–187 (2009). https://doi.org/10.1007/s10290-009-0010-9

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