The Increasing Irrelevance of Trade Diversion

Abstract

Summary This paper is intended as a guide for policymakers considering new regional trade agreements. The data provided here show that only about a quarter of imports are potentially subject to trade diversion from new agreements (i.e. they come from countries outside of regional trading blocs and in industries with positive most‐favored nation tariffs). Since this percentage is steadily declining with the increasing number of regional trade agreements and the falling level of tariffs, trade diversion is becoming increasingly irrelevant as a concern for new trade deals. The paper also estimates how each potential new bilateral free trade agreement would affect a country's imports and exports, as well as whether the increased imports would replace domestic production, imports from other RTA partners, or imports from non‐RTA partners. In this way, the estimates are able to shed light on which countries make the best partners for new regional trade agreements. Finally, the paper provides estimates of the trade effects for two large potential new regional agreements: the Transatlantic Trade and Investment Partnership and the Trans‐Pacific Partnership.

Is NAFTA Trade‐Creating or Trade‐Diverting? A System GMM Approach

“…Their simulated results demonstrated that ChAFTA has a significant trade creation effect. These results are supported by Magee (2017), who provided a systematic analysis of the trade effects of all potential preferential trade agreements. The author argued that most countries no longer suffer from trade diversion as a result of new RTAs.…”

Ventajas y desventajas de la firma de tratados de libre comercio

“…Por otra parte, al eliminar las barreras arancelarias a las importaciones, puede ocurrir un reemplazo de una parte de la producción interna de un país por importaciones de un productor con mayor eficiencia (Magee 2017). Stellian y Danna-Buitrago (2017) argumentan en su estudio que Colombia, en materia de productos agrícolas, no cuenta con la competitividad suficiente como para aprovechar un TLC con Estados Unidos, y que estos productos presentan desventajas sin la presencia de un régimen proteccionista.…”

“…Los acuerdos comerciales tienen como objetivo crear espacios en donde bienes, servicios, capital o trabajo puedan circular de manera libre entre los Estados pertenecientes a estos acuerdos (Duina 2006); para 2013, 15 % de los pares de países contaban con un TLC o una unión aduanera entre ellos y casi la mitad del comercio mundial se generaba dentro de estos bloques comerciales (Magee 2017).…”

Sectoral FTA gains, conflicts, and the role of interindustry factor mobility: Evidence from Korea's free trade agreement

“…For example, IT or manufacturing industries may enjoy the gains only after large FTA deals (e.g., Korea-EU and Korea-US, as in Decreux et al (2010) and Cooper et al (2011)) because the Korean companies can improve market share and revenue substantially in the large partner markets. In contrast, Magee (2017) argued that if tariffs are already low before FTAs, trade diversion in FTA partners to Korean industries may not occur. However, the economy size and the tariffs of the FTA partners are controlled in our models.…”