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Discussion Paper Details

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Title: A Test of Endogenous Trade Bloc Formation Theory on EU Data

Author(s): Richard Baldwin and Roland Rieder

Publication Date: July 2007

Keyword(s): Domino theory of regionalism, Endogenous trade bloc formation and EU enlargement

Programme Area(s): International Trade and Regional Economics

Abstract: This paper empirically confronts one explanation of spreading regionalism with the European experience. The domino theory asserts that forming a preferential trade area, or deepening an existing one, produces trade diversion that generates new political-economy forces in third nations as third-nation exporters seek to redress the new discrimination and profit from newly deepened preferences. The pressure increases with the bloc?s size yet bloc size depends upon how many nations join, so a single incidence of regionalism may trigger several rounds of membership requests from nations that were previously happy to stay out. We estimate a time-series of EU trade creation and diversion over the last five decades and use these to estimate a model EU membership demands. The results provide broad support for the model and show that trade diversion has a more powerful impact on membership than trade creation.

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Bibliographic Reference

Baldwin, R and Rieder, R. 2007. 'A Test of Endogenous Trade Bloc Formation Theory on EU Data'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6389