Impact of regional trading blocs and free trading agreements on bilateral trade : An application of Gravity model in international trade

Abstract

Using Augmented Gravity Model in Panel context covering 9,832 country pairs (184 countries) over 9 years, the present study examines the Average Treatment Effect (ATE) of FTA, trade creation (TC) and trade diversion (TD) effects of Regional Trading Blocs (RTBs) and the FTA and RTB interactive effects with the help of seven RTBs, namely; ASEAN, NAFTA, EFTA, DR-CAFTA, EU, CARICOM and SAARC networked with 79 FTAs. An extensive research followed by a number of sensitivity analysis robustly concludes that ATE of FTA is only about 3%-4% per annum, which implies that the trade will be doubled only after18-19 years for a country pair forming an FTA now. In connection to TC and TD we find mixed results where the intra-bloc trade of NAFTA and ASEAN is overwhelming while that of EU and DR-CAFTA is moderate. On the other hand, the intra-bloc trade of EFTA is negative whereas the effects are insignificant for SAARC and CARICOM.