Trade Creation and Diversion Effects of Regional Trade Agreements on Commodity Trade

Author Name URATA Shujiro (Faculty Fellow, RIETI) / OKABE Misa (Wakayama University)
Creation Date/NO. January 2010 10-E-007
Download / Links


This paper examines the impacts of regional trade agreements (RTAs) on commodity trade, with a particular focus on trade creation and diversion effects. Based on the estimation of the gravity equation for commodity trade, dealing with zero-trade flow and endogeneity problems, we analyze the impacts of various types of RTAs involving 67 countries for 20 commodities during 1980-2006. We identify that partial scope (PS) RTAs and RTAs among developing countries tend to cause trade diversion. Taking tariff rates into consideration explicitly, our results suggest that trade diversion is likely to be caused by the remaining tariffs on imports from non-members, while trade creation would be caused by various factors besides the reduction in tariff rates. As for specific RTAs, the EU is shown to have a trade creation effect in trade of agricultural commodities, while the AFTA and the NAFTA have trade creation effects in all types of machinery trade. These results seem to indicate that regional production and distribution networks in machinery have been formulated thanks to the reduction of tariffs under RTAs.

Published: Shujiro Urata, Misa Okabe, 2014. "Trade Creation and Diversion Effects of Regional Trade Agreements: A Product-level Analysis," The World Economy, Vol. 37(2), pp. 267-289.