Trade creation and trade diversion of economic integration agreements revisited: a constrained panel pseudo-maximum like
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Trade creation and trade diversion of economic integration agreements revisited: a constrained panel pseudo‑maximum likelihood approach Michael Pfaffermayr1,2 Published online: 19 September 2020 © The Author(s) 2020
Abstract For PPML estimation of high-dimensional structural gravity panel models it proves useful to exploit the equilibrium restrictions imposed by the system of multilateral resistances. The main advantage of this approach lies in the functional dependence of the parameters of all dummy variables on the structural trade cost parameters. Moreover, the delta method is used to establish confidence intervals of counterfactual changes. Using the constrained panel PPML estimator for a panel of 65 countries in the period 1994–2012 indicates significant trade creation of economic integration agreements with average ranging in between 12.2 and 30.3% in 2012. Results also point to substantial domestic and international trade diversion, where the former dominates the latter. Keywords Trade creation · Trade diversion · Economic integration agreements · Constrained panel Poisson pseudo maximum likelihood estimation · International trade · Gravity equation · Structural estimation JEL Classification F10 · F15 · C13 · C50
I would like to thank three anonymous referees, the editor Gerald Willmann and the participants of the ETSG conference in Warsaw, 2018, for helpful comments. * Michael Pfaffermayr [email protected] 1
Department of Economic Theory, ‑Policy and ‑History, University of Innsbruck, Universitaetsstr. 15, 6020 Innsbruck, Austria
2
Austrian Institute of Economic Research, Arsenal, Objekt 20, 1030 Vienna, Austria
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986 M. Pfaffermayr
1 Introduction The large number of existing economic integration agreements (EIAs) has induced what is called a spaghetti bowl of preferential trade relationships. A myriad of papers assesses the impact of EIAs on bilateral trade and welfare empirically, mainly focusing on the trade creation effects of EIAs. In contrast, evidence on the trade diversion effects of EIAs seems to be more scarce. The measurement of the trade creating impact of EIAs is typically based on gravity models of bilateral trade and EIA-dummy indicators. Identifying trade diversion effects is less straight forward. Many contributions use a reduced form measuring trade diversion by a dummy variable that picks out trade flows between any two countries that do not share an EIA, but either the exporter country or the importer country (or both) have one or more EIAs in force with other countries.1 Strictly speaking, in this design trade diversion is modelled as if the conclusion of an EIA between any two countries increases trade barriers toward third non-member countries. Economic theory predicts the adjustment of the terms of trade and, therefore, multilateral resistances, as a response to the formation of EIAs (Anderson and Yotov 2016). Actually, trade diversion is a consequence of the general equilibrium effects induced by EIAs, but not necessarily of new trade ba
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