Do free trade agreements actually increase members’ international trade?

Scott Baier and Jeffrey Bergstrand

No 2005-03, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable?s endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled.

Date: 2005
New Economics Papers: this item is included in nep-afr and nep-int
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Journal Article: Do free trade agreements actually increase members' international trade? (2007)
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