Trade effects of regional integration: A panel cointegration analysis

The paper quantifies the most likely trade effects of the exceptional cases of the GATT/WTO system, namely, Regional Integration Agreements, on the selected member as well as non-member countries of the EU, NAFTA, MERCOSUR and AFTA. To this end, the gravity model was estimated through fixed effects model and panel cointegration analysis. It was found that the explanatory power of the latter has superseded the former one. For the case of EU, it was found that the intra-union trade-creation effect is approximately six times larger than extra-union effects. In NAFTA, exports to outside countries are significantly diverted. For MERCOSUR, on the other hand, results indicate that the integration has not contributed to intra-union trade. The members are still significantly dependent on extra-union imports, just like the members of AFTA.

► Regional integration agreements have trade effects for both members and nonmembers. ► Estimations confirm superiority of DOLS relative to OLS and the fixed effect model. ► Increase in the intra-EU trade flows is six times higher than the extra-EU flows. ► Estimates for NAFTA do not show a significant increase in intra-union export flows. ► MERCOSUR and AFTA have not caused a significant increase in intra-union exports.