The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
The Trans-Pacific Partnership (TPP) has reinvigorated research on the ex-ante impact of
trade agreements. The results from these ex-ante models are subject to considerable
uncertainties, and needs to be complimented by ex-post studies. The paper fills this gap in
recent literature by employing synthetic control methods (SCM) - currently extremely
popular in micro and macro studies - to understand the impact of trade agreements in the
period 1983-1995 for 104 country pairs. The key advantage of using SCM to address
selection bias - one of the persisting issues in trade literature - is that it allows the effect of
unobserved confounder to vary with time, as opposed to traditional econometric methods that
can deal with time-invariant unobserved country characteristics. Using SCM approach, the
paper finds that trade agreements can generate substantial gains, on average an increase of
exports by 80 percentage points over ten years. The export gains are higher when emerging
markets have trade agreements with advanced markets. The paper shows that all the countries
in NAFTA have substantially gained due to NAFTA. Finally, there is some evidence that
trade agreements can potentially lead to slight import diversion, but not export diversion.