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

Theo Eicher, Christian Henn and Chris Papageorgiou ()

Working Papers from University of Washington, Department of Economics

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.

Date: 2010-05
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Citations: View citations in EconPapers (14)

Published in Journal of Applied Econometrics, Volume 2010

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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 (2008)
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