Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects

Chris Papageorgiou (), Christian Henn and Theo Eicher

No 2008/066, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; PTA coefficient; trade flow; North-South trade; robustness analysis; PTA trade creation; trade creation effect; factor endowments; evidence of trade creation; model uncertainty; Trade balance; Trade agreements; Plurilateral trade; North American Free Trade Agreement; Bayesian models; Central America (search for similar items in EconPapers)
Pages: 30
Date: 2008-03-01
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Trade creation and diversion revisited: Accounting for model uncertainty and natural trading partner effects (2012)
Working Paper: Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects (2010)
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