It is much bigger than what we thought: new estimate of trade diversion

Cheong, Juyong, Kwak, Do Won and Tang, Kam Ki (2015) It is much bigger than what we thought: new estimate of trade diversion. World Economy, 1-14. doi:10.1111/twec.12297

Author Cheong, Juyong
Kwak, Do Won
Tang, Kam Ki
Title It is much bigger than what we thought: new estimate of trade diversion
Journal name World Economy   Check publisher's open access policy
ISSN 0378-5920
Publication date 2015-07-25
Sub-type Article (original research)
DOI 10.1111/twec.12297
Start page 1
End page 14
Total pages 14
Place of publication Chichester, West Sussex, United Kingdom
Publisher Wiley-Blackwell Publishing
Collection year 2016
Language eng
Formatted abstract
Estimates of the trade diversion (TD) effect of preferential trade agreements (PTAs) tend to be much smaller than that of the trade creation (TC) effect. This paper examines two sources of estimation bias of the TD effect. The first bias arises from the failure to recognise that the concept of TD is inapplicable for a substantial proportion of PTAs, and thus, previous studies wrongly count cases where trade cannot be diverted as cases where trade is not diverted. The second bias arises from the difficulty in controlling for multilateral resistance and other unobserved time-varying country heterogeneity when estimating both TC and TD effects simultaneously due to perfect multicollinearity. This paper corrects these two biases using a new measure of TD which provides a better mapping between the concept and data characteristics. Removing the two sources of bias leads to a multifold increase in the estimate of the TD effect. It is found that the total TD effect is comparable to the TC effect in dollar terms.
Keyword Trade diversion
Preferential trade agreements
Trade creation
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ
Additional Notes Early view of article. Published online 25 July 2015.

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2016 Collection
School of Economics Publications
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Created: Mon, 27 Jul 2015, 11:39:57 EST by Alys Hohnen on behalf of School of Economics