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Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects
Author:
Mr. Chris Papageorgiou
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,
Christian Henn
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Theo S. Eicher null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 066
Language:
English
Publication Date:
01 Mar 2008
DOI:
https://doi.org/10.5089/9781451869286.001
ISBN:
9781451869286
ISSN:
1018-5941
Pages:
30
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund