Trade creation and trade diversion of economic integration agreements revisited: a constrained panel pseudo-maximum likelihood approach

Abstract

For PPML estimation of high-dimensional structural gravity panel models it proves useful to exploit the equilibrium restrictions imposed by the system of multilateral resistances. The main advantage of this approach lies in the functional dependence of the parameters of all dummy variables on the structural trade cost parameters. Moreover, the delta method is used to establish confidence intervals of counterfactual changes. Using the constrained panel PPML estimator for a panel of 65 countries in the period 1994–2012 indicates significant trade creation of economic integration agreements with average ranging in between 12.2 and 30.3% in 2012. Results also point to substantial domestic and international trade diversion, where the former dominates the latter.

Estimating the trade and welfare effects of Brexit: A panel data structural gravity model

“…7 7 Monte‐Carlo evidence provided in Pfaffermayr (2018) confirms this view and shows that robust standard errors of PPML estimates are typically downward biased so that parametric bootstrap procedures do no yield reliable confidence intervals. …”

“…Third, CPPMLE allows to apply the delta method3 for calculating trade theory‐consistent confidence intervals, which are important for accurately assessing the uncertainty involved when applying various alternative post‐Brexit trade policy scenarios. Monte Carlo simulations provided in the online technical appendix and in Pfaffermayr (2018) indicate that the estimated standard errors of panel data CPPMLE for both the structural parameters and the counterfactual general equilibrium predictions do not suffer from finite sample bias, and that coverage rates of the confidence intervals are correct in the panels with a minimum country coverage of about 60 economies. The panel data CPPMLE approach might be preferable compared with routinely applied bootstrapping procedures.…”

“…3 3 The delta method is designed to provide confidence intervals of non‐linear functions of the estimated parameters such as the prediction of trade flows among specific country pairs under different counterfactual scenarios (see Pfaffermayr 2018 and the online technical appendix for details). In general, the delta method is an intuitive technique for approximating the moments of functions of random variables (e.g., the conditional variance) by making use of polynomial functions such as a truncated Taylor series centred at the mean of the random variable (Oehlert 1992).…”

The impact of preferential trade agreements on bilateral trade: A structural gravity model analysis

“…Global value chains (GVCs) play increasingly significant roles in the production of goods [11] and the shortage in the supply of some products under the COVID-19 pandemic [12], measuring the product coverage of PTAs and identifying the effect of the product-based market liberalization of PTAs on bilateral trade is important. More scholars have studied how PTAs affect bilateral trade and conclude that PTAs could influence bilateral trade through trade creation and diversion effects [13][14][15][16]. Scholars established that the trade creation (increased trade because of relative efficiency) impact could be higher than the trade diversion effect (increased trade because of preference) [17,18].…”

Is Trade in COVID-19 Products in ASEAN Economies a Building or Stumbling Block?

“…Arguments that regionalism may be a building or a stumbling block to the WTO's multilateral trade liberalization have been widely developed in empirical studies by Baldwin and Seghezza (2010), Pfaffermayr (2020), and Trotignon (2010), among others. Baldwin and Seghezza (2010) examine the relationship between MFN and PTA tariffs and find that PTA tariffs have positive and significant effects on MFN tariffs.…”