DP2183 Regionalism in the Nineties: What Effect on Trade?

Author(s): Isidro Soloaga, L. Alan Winters
Publication Date: June 1999
Keyword(s): European Integration, Gravity Model, Regional Integration, Trade Diversion
JEL(s): F13, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2183

The paper applies a gravity model to 1980-1996 annual non-fuel imports data for 58 countries to quantify the effects of recently created or revamped PTAs on trade. We modify the usual gravity equation to identify separate effects of PTAs on intra-bloc trade, members' total imports and their total exports. We also innovate by formally testing the significance of changes in the estimated coefficients before and after blocs' formation. Our estimations show no indication that the 'new wave' of regionalism boosted intra-bloc trade significantly. Regarding trade diversion, we found convincing evidence of it only for EU and EFTA (and for the same blocs also, we observed exports diversion, which would be consistent with their imposing a welfare cost on the ROW). Trade liberalization efforts in Latin America had a positive impact on bloc members' imports (ANDEAN, CACM, LAIA and MERCOSUR), although MERCOSUR's exports decreased in the last part of the sample.