On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration

By S. Baier, Yoto V. Yotov, Thomas Zylkin. Journal of International Economics, 2019

382 citations recorded by the source corpus.

We develop a novel two-stage methodology that allows us to study the empirical determinants of the ex post effects of past free trade agreements (FTAs) as well as obtain ex ante predictions for the effects of future FTAs. We first identify 908 unique estimates of the effects of FTAs on different trading pairs for the years 1986-2006. We then employ these estimates as our dependent variable in a “second stage” characterizing the heterogeneity in these effects. Interestingly, most of this heterogeneity (~ 2/3) occurs within FTAs (rather than across different FTAs), with asymmetric effects within pairs (on exports vs. imports) also playing a important role. We offer several intuitive explanations for these variations. Even with the same agreement, FTA effects are weaker for more distant pairs and for pairs with otherwise high levels of ex ante trade frictions. The effects of new FTAs are similarly weaker for pairs with existing agreements already in place. In addition, we are able to relate asymmetries in FTA effects to each country’s ability to influence the other’s terms of trade. Out-of-sample predictions incorporating these insights enable us to predict direction-specific effects of future FTAs between any pair of countries. A simulation of the general equilibrium effects of TTIP demonstrates the importance of our methods.

Subfields: Development, Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/75de2e93ba04bdf46cefe8539f0273cc6bdba019

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Citations in the corpus

An Advanced Guide to Trade Policy Analysis: The Structural Gravity Model (2016, positive): “An alternative approach, which is the object of an exercise in the next section, is to obtain a specific estimate of the RTA under investigation by introducing an additional indicator covariate for NAFTA in the gravity specification and then using the estimate of NAFTA dummy to obtain the general eq”
Estimating Trade Policy Effects with Structural Gravity (2016, positive): “The main reasons for this recommendation include: The fact that the use of panel data will lead to improved estimation efficiency; In addition, the panel dimension would enable researchers to apply the pair-fixed-effects methods of Baier and Bergstrand (2007) to address the issue of endogeneity of t”