Jeffrey H. Bergstrand

Do Free Trade Agreements Actually Increase Members' International Trade?

For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable?s endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled.

The growth of world trade: tariffs, transport costs, and income similarity

Abstract In the 25th anniversary issue of the Brookings Papers on Economic Activity, Paul Krugman [Krugman, P., 1995. Growing world trade: Causes and consequences. Brookings Papers on Economic Activity (1), 327–377] stated that the answer to the fundamental question “Why has world trade grown?” remains surprisingly disputed. He noted that journalistic discussion tends to view the growth of world trade as due to technology-led declines in transportation costs, while economists argue that policy-led multilateral and bilateral trade liberalization has spurred this growth. A third potential explanation raised by Elhanan Helpman [Helpman, E., 1987. Imperfect competition and international trade: Evidence from fourteen industrial countries. Journal of the Japanese and International Economies 1 (1) 62–81] and Hummels and Levinsohn (1995) [Hummels, D., Levinsohn, J., 1995. Monopolistic competition and international trade: Reconsidering the evidence. Quarterly Journal of Economics 110 (3) 799–836] is increased similarity of countries’ incomes. The purpose of this study is to disentangle from one another (and from income growth) the relative effects of transport-cost reductions, tariff liberalization, and income convergence on the growth of world trade among several OECD countries between the late 1950s and the late 1980s. In the context of the model, the empirical results suggest that income growth explains about 67%, tariff-rate reductions about 25%, transport-cost declines about 8%, and income convergence virtually none of the average world trade growth of our post World War II sample.

Economic determinants of free trade agreements

Abstract The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements (FTAs) and of the likelihood of FTAs between pairs of countries using a qualitative choice model. We develop this econometric model based upon a general equilibrium model of world trade with two factors of production, two monopolistically-competitive product markets, and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents. The empirical model correctly predicts, based solely upon economic characteristics, 85% of the 286 FTAs existing in 1996 among 1431 pairs of countries and 97% of the remaining 1145 pairs with no FTAs.

Gravity Equations and Economic Frictions in the World Economy

At the same time that the modern theory of international trade due to comparative advantage developed in the post-World War II era to explain the patterns of international trade using 2 × 2 × 2 general equilibrium models, a small and separate line of empirical research in international trade emerged to ‘explain’ statistically actual aggregate bilateral trade flows among large numbers of countries. Drawing upon analogy to Isaac Newton’s Law of Gravitation, these international trade economists noted that observed bilateral aggregate trade flows between any pair of countries i and j could be explained very well using statistical methods by the product of the economic sizes of the two countries (GDP i GDP j ) divided by the distance between the country pair’s major economic centers (DIST ij ). Specifically, these researchers conjectured that:

Currency substitution and monetary autonomy: the foreign demand for US demand deposits

P{X_{ij}} = {\beta _0}{(GD{P_i})^{{\beta _1}}}{(GD{P_j})^{{\beta _2}}}{(DIS{T_{ij}})^{{\beta _3}}}{\varepsilon _{ij}}

Introduction - The Sequencing of Regional Economic Integration

(1) or

Chapter 15 - Summary and Conclusions

\ln P{X_{ij}} = ln{\beta _0} + {\beta _1}ln{\mkern 1mu} {\text{GD}}{{\text{P}}_i} + {\beta _2}ln{\mkern 1mu} {\text{GD}}{{\text{P}}_j} + {\beta _3}ln{\mkern 1mu} {\text{DIS}}{{\text{T}}_{ij}} + ln{\mkern 1mu} {\varepsilon _{ij}},