Proliferating Regional Trade Arrangements: Why and Whither?
48 Pages Posted: 15 Oct 2004
Date Written: October 2004
This paper investigates why regional trade arrangements (RTAs) are proliferating extensively and how the effects of multiple RTAs, by interacting with each other, evolve over time. Our empirical analysis, based on an extended gravity model utilizing a large panel data set of 175 countries from 1948 to 1999, shows that RTAs on average increase global trade by raising intra-bloc trade without damaging extra-bloc trade. The net trade effects, however, heavily depend on the types of RTA strategic evolution over time, which we group as expansionary RTAs, duplicate RTAs or overlapping RTAs. We find that countries excluded from an RTA can benefit more from duplicating a separate RTA than from joining an existing RTA. This result explains why the number of bilateral trade blocs, rather than the membership size of existing RTAs, is currently exploding. We also find that the net trade creation effects of RTAs are substantially lower for countries participating in overlapping RTAs. This result suggests that it is less likely that the currently proliferating RTAs will completely merge and lead the world economy to global free trade. Our empirical results are robust to controlling for the characteristics of countries that may influence the impact of RTAs.
Keywords: Regional Trade Arrangement (RTA), trade creation, trade diversion, regional trade, global trade
JEL Classification: F02, F15
Suggested Citation: Suggested Citation