Trade Creation and Diversion Effects of Regional Trade Agreements: A Product‐Level Analysis

23 Pages Posted: 11 Feb 2014

See all articles by Shujiro Urata

Shujiro Urata

Waseda University-Graduate School of Asia-Pacific Studies

Misa Okabe

Wakayama University - Faculty of Economics

Date Written: February 2014

Abstract

This paper examines the impacts of regional trade agreements (RTAs) on trade flows at product level, with a particular focus on trade creation and diversion. Based on estimation of the gravity equation, dealing with the zero trade flows and endogeneity bias problems, we analyse the impacts of various types of RTAs involving 67 countries for 20 products during the 1980–2006 period. We find that RTAs among developing countries tend to cause trade diversion compared with RTAs among developed countries. Taking the higher external tariff rates of developing countries compared with developed countries into consideration, our results suggest trade diversion is likely to be caused by remaining high tariffs on imports from non‐members. In addition, we find the trade creation effect for many products in the cases of Customs Unions and plurilateral RTAs. These results imply that trade creation would be caused by various factors besides the reduction in tariff rates. Based on these results, we draw a policy implication that external tariff rate reduction is an important factor in avoiding trade diversion in the formation of RTAs, in particular for RTAs among developing countries, while a large number of members and the common external tariff appear to be important for generating the trade creation effect.

Suggested Citation

Urata, Shujiro and Okabe, Misa, Trade Creation and Diversion Effects of Regional Trade Agreements: A Product‐Level Analysis (February 2014). The World Economy, Vol. 37, Issue 2, pp. 267-289, 2014. Available at SSRN: https://ssrn.com/abstract=2393741 or http://dx.doi.org/10.1111/twec.12099

Shujiro Urata (Contact Author)

Waseda University-Graduate School of Asia-Pacific Studies ( email )

1-21-1 Nishiwaseda
Shinjuku-ku, Tokyo 169-8050
Japan

Misa Okabe

Wakayama University - Faculty of Economics

930 Sakaedani
Wakayama, 640-8441
Japan

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