The Trade and Investment Effects of Preferential Trading Arrangements

72 Pages Posted: 17 Dec 2003 Last revised: 7 Apr 2022

See all articles by Philippa Dee

Philippa Dee

Australian National University - Crawford School of Public Policy

V. Jyothi Gali

Government of the Commonwealth of Australia - Productivity Commission

Date Written: December 2003

Abstract

This study quantifies the impact of traditional and new age' provisions of preferential trading arrangements (PTAs) on merchandise trade and investment. It does so by estimating gravity models of bilateral trade and investment. It finds that recent and some past PTAs are not as benign as some contemporary empirical assessments have suggested. A careful consideration of the analytical issues including controlling comprehensively for other observable and unobservable factors, and testing explicitly for whether the trade and investment effects are significantly different after PTA formation than before accounts for less favourable finding in this study. It is also possible for PTAs to have adverse effects on investment flows. If investment responds in beachhead' fashion to the trade provisions of PTAs, the trade carried out from those beachheads could constitute traditional trade diversion. However, the paper finds little evidence of beachhead investment. Instead, it finds evidence of net investment creation in response to the new age', non-trade provisions of PTAs. Thus the finding on investment is more positive than for trade, but not without qualifications, since trade diversion is still possible from the new investment positions.

Suggested Citation

Dee, Philippa and Gali, V. Jyothi, The Trade and Investment Effects of Preferential Trading Arrangements (December 2003). NBER Working Paper No. w10160, Available at SSRN: https://ssrn.com/abstract=478671

Philippa Dee (Contact Author)

Australian National University - Crawford School of Public Policy ( email )

Crawford Building (132)
Lennox Crossing, ANU
Canberra, Australian Capital Territory 0200
Australia

V. Jyothi Gali

Government of the Commonwealth of Australia - Productivity Commission ( email )

Level 28
35 Collins St.
Melbourne, Victoria, Victoria 3000
Australia

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