Do Free Trade Agreements Actually Increase Members' International Trade?

FRB of Atlanta Working Paper No. 2005-3

47 Pages Posted: 23 Feb 2005

See all articles by Scott L. Baier

Scott L. Baier

Clemson University - John E. Walker Department of Economics

Jeffrey H. Bergstrand

University of Notre Dame

Date Written: February 2005

Abstract

For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled.

Keywords: International trade, free trade agreements, gravity equation

JEL Classification: F10, F13

Suggested Citation

Baier, Scott Leonard and Bergstrand, Jeffrey H., Do Free Trade Agreements Actually Increase Members' International Trade? (February 2005). FRB of Atlanta Working Paper No. 2005-3, Available at SSRN: https://ssrn.com/abstract=670982 or http://dx.doi.org/10.2139/ssrn.670982

Scott Leonard Baier

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-4534 (Phone)

Jeffrey H. Bergstrand (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556
United States
574-631-6761 (Phone)
574-631-5255 (Fax)

HOME PAGE: http://www3.nd.edu/~jbergstr

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