Armington, P., 1969, “A Theory of Demand for Products by Place of Production,” Staff Papers, International Monetary Fund, Vol. 16, No. 1, pp. 170–201.
Baier, S. L., and J. H. Bergstrand, 2005, “Do Free Trade Agreements Actually Increase Member’s International Trade,” Federal Reserve Bank of Atlanta Working Paper 2005–3.
Bandara, J. S., and W. Yu, 2003, “How Desirable is the South Asian Free Trade Area? A Quantitative Assessment,” World Economy, Vol. 26, No. 9, pp. 1293–1323.
Baunsgaard, T., and M. Keen, 2005, “Tax Revenue and (or?) Trade Liberalization.” IMF Working Paper No. 05/112 (Washington: IMF).
Baysan, T., A. Panagariya, and N. Pitigala, 2006, “Preferential Trading in South Asia,” World Bank Policy Research Working Paper No. 3813 (Washington: World Bank).
Bhagwati, J., and A. Panagariya, 1996, “The Theory of Preferential Trade Agreements: Historical Evolution and Current Trends,” American Economic Review, Vol. 86, No. 2, pp. 82–87.
Bloningen, B.A. and W.W. Wilson (1999), “Explaining Armington: What Determines Substitutability between Home and Foreign Goods?” The Canadian Journal of Economics, Vol. 32, No. 1, pp. 1–21.
Carrère, C., 2006, “Revisiting the Effects of Regional Trade Agreements on Trade Flows with Proper Specification of the Gravity Model,” European Economic Review, Vol. 50, pp. 223–47.
Dimaranan, B.V., 2002, “Preferential Tariff Rates from WITS and MacMaps: Comparison for Tariffs on Manufactured Commodities.” Available via the Internet: https://www.gtap.agecon.purdue.edu/events/Board_Meetings/2003/docs.
Feridhanusetyawan, T., 2005, “Preferential Trade Agreements in the Asia-Pacific Region,” IMF Working Paper No. 05/149 (Washington: IMF).
Feenstra, R.C., J.R. Markusen, and A.K. Rose, 2001, “Using the Gravity Equation to Differentiate Among Alternative Theories of Trade,” Canadian Journal of Economics, Vol. 34, No. 2, pp. 430–47.
Gilbert, J., R. Scollay, and B. Bora, 2001, “Assessing Regional Trading Arrangements in the Asia-Pacific,” United Nations Conference on Trade and Development, Policy Issues in International Trade and Commodities, Study Series No. 15.
Hertel, T., D. Hummels, M. Ivanic, and R. Keeney, 2003, “How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements,” GTAP Working Paper No. 26.
International Monetary Fund, 2006, “Integrating Poor Countries into the World Trading System,” Economic Issues, No. 37 (Washington: IMF).
Newfarmer, R., and M.D. Piérola, 2006, “SAFTA: Promise and Pitfalls of Preferential Trade Arrangements,” (unpublished; Washington: World Bank).
Panagariya, A., 2003, “South Asia: Does Preferential Trade Liberalization Make Sense?” World Economy, Vol. 26, No. 9, pp. 1279–291.
SAARC Secretariat, 2006b, “Agreement on South Asian Free Trade Area (SAFTA).” Available via the Internet: http://www.saarc-sec.org.
SAARC Secretariat, 2006c, “Agreement on SAARC Preferential Trading Arrangement (SAPTA)” Available via the Internet: http://www.saarc-sec.org
Srinivasan, T.N. (1994), “Regional Trading Arrangements and Beyond: Exploring Some Policy Options for South Asia” World Bank Report No. IDP 42.
Tumbarello, P., 2006, “Are Regional Trade Agreements in Asia Open or Closed Blocs?” in Asia and Pacific Regional Outlook, May, pp. 74–78 (Washington: IMF).
Varbeek, M., and T. Nijman, 1996, “Incomplete Panels and Selection Bias,” in The Econometrics of Panel Data: A Handbook of the Theory with Applications, Second Edition, ed. by Laszlo Matyas and Patrick Sevestre.
Appendix I: Selection Bias
The author was a winter intern in the IMF’s Asia and Pacific Department and a PhD candidate at the University of Minnesota when this paper was prepared. I am grateful to Sanjay Kalra for his constant guidance and encouragement and to Jerald Schiff for very valuable comments. The IMF division working on Bhutan, India, Nepal, and Sri Lanka provided a stimulating and hospitable environment.
The literature about trade agreements is rich in acronyms that denote either their geographical extension or their degree of trade barrier reductions. RTAs refer to agreements involving regional partners. Free Trade Agreements (FTAs) refers to agreements that includes the full elimination of tariffs (and trade barriers) while Preferential Trade Agreements (PTAs) s refer to agreements involving partial tariff elimination. For example, SAPTA is South Asia’s PTA and SAFTA is South Asia’s FTA.
Countries could also choose to unilaterally reduce their trade barriers. In this paper we abstract from this option, although the method used here could be applied to the analysis of unilateral liberalizations.
They take the form of positive (inclusions) or negative (exclusions) lists.
Examples include percentage of value added in member country(ies) and specific content requirements.
Plus 3 is used to denote the group consisting of China (including Hong Kong), Japan and Korea.
Due to limited availability of trade statistics for smaller members, the variability should be interpreted with caution. The last observation year for these four members (exports and imports) is 1999.
The GTAP database used in the paper includes Bangladesh, India, and Sri Lanka as individual countries and an aggregator named Rest of South Asia.
Usually denoted as CGE (Computable General Equilibrium) or GTAP. The latter denotes the use of GEMPACK programming language in the solution of the model and the source of the data. See https://www.gtap.agecon.purdue.edu/. Recent examples include World Bank (2004).
As an example of such a restriction, taken literally, the gravity equation implies that all country pairs should trade in a positive amount notwithstanding their distance or trade barriers.
Broadly speaking, it requires a deep knowledge of the input-output structure of each country as well as some preferences and production technology parameters for which data is scarce.
For instance, some studies (e.g., Hertel and others, 2003) use an econometric specification similar to Equation 2 to obtain estimates of preferences parameters for subsequent use in the general equilibrium model.
Some analysts have used net trade creation (= trade creation-trade diversion) as capturing changes in welfare, but as Baysan, Panagariya, and Pitigala (2006) argue, “[those analysts] might have simply missed the key point.”
These numbers ignore the heterogeneity of tariffs levels across commodities. A natural extension of this paper would be to modify the level of aggregation.
In the literature it is also common to use exports or total bilateral trade (exports + imports).
In the empirical implementation, the sensitivity to tariffs is allowed to differ by source (i.e., the originating block—NAFTA, EU, ASEAN, Plus 3 or ROW). For exposition purposes, a more general version is presented.
Bloningen and Wilson’s analysis was not particular to tariff changes but to the more basic reaction of imports to price changes. As an important element of prices, tariffs are an immediate application.
Both datasets were accessed through the WITS software (http://wits.worldbank.org).
Bandara and Yu (2003) use a similar argument to explain the welfare decrease that a SA + ASEAN trade agreement would have for South Asian countries.