Title: Impact of regional trade agreements on trade creation and trade diversion using the structural gravity model
Authors: Barton Sy - TAT SING International Logistics Corporation (Philippines) [presenting]
Stephen Jun Villejo - University of the Philippines (Philippines)
Rutcher Lacaza - University of the Philippines (Philippines)
Abstract: The aim is to examine the impact of regional trade agreements such as the ASEAN Free Trade Agreement (AFTA) using the structural gravity model. The empirical analysis uses trade data of member countries of ASEAN, APEC, and EU from 1990 to 2014. Estimation of multilateral resistances used the fixed effects method. Because of zero trade flows and heteroscedasticity in the data, nonlinear methods are employed, namely the Helpman two-step selection process method and the Poisson Pseudo Maximum Likelihood approach. In addition to using exporter-time and importer-time fixed effects, pair fixed effects are also used to account for the endogeneity of the trade policy variables. A methodology to test for potential reverse causality, and non-linear and phasing-in effects of trade agreements and policies is implemented. Results show that the AFTA is a significant positive determinant for trade creation and does not cause trade diversion, though this is not the case for the other regional trade agreements. The results also confirm the absence of reverse causality. Lastly, the results show that the trade agreements have a non-linear phasing-in effect wherein the lag 3 effect has the highest magnitude.