Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects
Electronic Access:
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Summary:
Trade theories covering Preferential Trade Agreements (PTAs) are as diverse as the literature in search of their empirical support. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. BMA minimizes the sum of Type I and Type II error, the mean squared error, and generates predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we report clear evidence of Trade Creation, Trade Diversion, and Open Bloc effects. After controlling for natural trading partner effects, Trade Creation is weaker - except for the EU. To calculate the actual effects of PTAs on trade flows we show that the analysis must be comprehensive: it must control for Trade Creation and Diversion as well as all possible PTAs. Several prominent control variables are also shown to be robustly related to Trade Creation; they relate to factor endowments and economic policy.
Series:
Working Paper No. 2008/066
Subject:
Bayesian models Customs unions Econometric analysis International trade North American Free Trade Agreement Plurilateral trade Trade agreements Trade balance
English
Publication Date:
March 1, 2008
ISBN/ISSN:
9781451869286/1018-5941
Stock No:
WPIEA2008066
Pages:
30
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