Effects of Free Trade Areas in Trade Promotion: Gravity Model Approach

• Main Author: LIM, Mona Jit Mui
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: free trade agreement; NAFTA; ASEAN; EU; trade creation; asymmetry; Economic Policy; International Economics; International Trade Law
• Online Access: https://ink.library.smu.edu.sg/etd_coll/74; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1073&context=etd_coll
• Institution: Singapore Management University

Since the early 1990s, the world has seen a proliferation of Free Trade Agreements (FTAs). One of the key objectives of FTAs is to expand trade between or amongst its signatories. This study explores the intra-FTA and extra-FTA trade expansion capability of 3 types of FTA: North-North FTA (European Union (EU)-15 as a representative), North-South FTA (North America Free Trade Agreement (NAFTA) as a representative) and South-South FTA (Association of Southeast Asia Nations (ASEAN ) Free Trade Agreement (AFTA) as a representative). The study made an attempt to address the spread of such FTA-led trade expansion amongst the members and non-members. Gravity model is employed to run the bilateral trade data against the variables of relative sizes of the pair of countries/ economies involved in trade (using GDP), distance, common border and language, and dummies for each of the FTAs. Our findings reveal that all 3 FTAs lead to trade expansion, both within members and with non-members. However, such expansion is biased favorably towards intra-FTA trade. Of the three FTAs studied, NAFTA is the most expansionary in terms of trade creation for intra- and extra-FTA trade, followed by EU-15. EU-27 and AFTA are close in their trade expansion capability for both intra- and extra-FTA trade. As each FTA is unique on its own in terms of other factors such as location, institution thickness and pre-FTA linkages not factored in the model used, the study could not conclude unambiguously which type of FTA is the most effective in the creation of trade. The spread of trade expansion is asymmetric : some benefit more than others. It seems that members with more established external linkages (and are economically advanced) tend to benefit more than those without. Non-members which are key global traders tend to benefit more from FTAs’ trade expansion than smaller global traders.