Revisiting Regional Trading Agreements with Proper Specification of the Gravity Model

Abstract

This paper uses a gravity model to assess ex-post regional trade agreements. The model includes 130 countries and is estimated in panel over the period 1962-96. The introduction of the correct number of dummy variables allows for identification of Vinerian trade creation and trade diversion effects, while the estimation method takes into account a potential correlation between the explanatory variables and the bilateral specific effects introduced in the model, as well as potential selection bias. In contrast with previous estimates, results show that over the period 1962-1996, regional agreements have generated a significant increase in trade between members, often at the expense of the rest of the world.Gravity equation, Regional trade agreements, Trade creation, Trade diversion, panel data.