Trade Creation, Trade Diversion and Investment Flows: Evidence from the Canada-Chile Free Trade Agreement
Guillermo José Yanez
HEC Montreal; Universidad Diego Portales
Institute of Research in Contemporary Economics Working Paper No. 375
Under the perspective of the new regionalism described by Ethier (2001), this paper examines the changes in trade patterns introduced with the Canada - Chile Free Trade Agreement signed in 1997. Dynamic gravity equations are used to appraise the trade creation or trade diversion effect for a sample period beginning in 1994 and ending in 2002. Commodities at the two digits Harmonized System level are included. No categorical evidence in favor of trade diversion has been found, adding some positive insight in northsouth type of bilateral agreements, from the trade perspective. Furthermore, this study also focuses on the systematic increase in Canadian direct foreign investment in Chile in the nineties due to this agreement. Significant adjusted negative returns were found and they were mainly explained by the slowdown that affected Latin-America and the world in the late nineties.
Keywords: international trade, international economics, capital flows, international finance
JEL Classification: C33, F10, F14, F15
Date posted: April 26, 2005