Regional Trade Agreements and the Pattern of Trade: A Networks Approach

Abstract:     
This paper uses a complex network approach for the analysis of bilateral trade data between countries over the period 1970-2000. We compute the network community structure for every year between 1970 and 2000 and compare it to null community structures that emerge from various models based on regional and geographic classifications, the implementation of RTA's and/or on gravity models of trade. Our results show that RTA formation appears to have a cyclical pattern on the world trade network community structure. We document periods where bilateral trade flows and the structure of the world trade network are consistent with those predicted by formation of RTAs. These cycles occur in 1980-86 and 1990-96. Conversely, we also find periods in which the pattern in the world trade network is not explained by RTA formation. Two periods, 1986-1990 and 1997-2000, show a pattern of bilateral trade flows that moves away from the prediction that results from assuming RTA-formation as the driving force in the determination of the world trade network structure. Factors contributing to the latter parts of the cycle we document may be due to the growing role of foreign investment and decreased trade costs over the sample period.

Keywords: International Trade Flows, Regional Trade Agreements, Complex Networks

JEL Classifications: F1, F15, C61

Working Paper Series