On the Dynamics of Trade Diversion: Evidence from Four Trade Blocs

52 Pages Posted: 21 Jun 2000

See all articles by Caroline L. Freund

Caroline L. Freund

World Bank - Macro, Trade and Investment

John McLaren

University of Virginia; NBER

Date Written: June 1999


This paper studies the dynamics of trade reorientation experienced when a country joins a regional trade bloc. We find that the joining country's trade orientation toward bloc countries typically rises along an 'S'-shaped path. We estimate the size, speed, and timing of this adjustment path for a 'typical' joining country, for four trade agreements. We find that, in the European Union (EU), the incumbent bloc countries' share of the joining country's trade typically rose by eighteen percentage points over the course of the adjustment; that this took twelve years; and that the adjustment began four years before the date of accession. MERCOSUR shows a similar pattern in progress, but NAFTA and EFTA are more idiosyncratic. We argue that the data provide strong evidence of anticipatory sunk investments made to prepare for accession.

Keywords: Regionalism, Sunk Costs

JEL Classification: F14, F15

Suggested Citation

Freund, Caroline L. and McLaren, John, On the Dynamics of Trade Diversion: Evidence from Four Trade Blocs (June 1999). International Finance Working Paper No. 637. Available at SSRN: https://ssrn.com/abstract=231779 or http://dx.doi.org/10.2139/ssrn.231779

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World Bank - Macro, Trade and Investment ( email )

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John McLaren

University of Virginia ( email )

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