The impact of Preferential Trade Agreements on the margins of international trade

In this paper we consider the trade creating effects of Preferential Trade Agreements (PTAs) for a large sample of countries within the period 1962-2000. The paper builds upon existing literature by examining whether any significant effects of PTAs occur through a change in the variety of exports (the extensive margin) or through a change in the volume of existing products (the intensive margin). To address this issue we employ the commonly used gravity equation as well as a matching approach to deal with potential self-selection problems. Our results indicate that exports respond positively to the formation of a PTA between countries, and that much of this increase in exports occurs along the extensive margin. We also show that the extensive margin responds more strongly to the formation of a PTA in larger exporters and for larger country pairs.

Research highlights▶ This paper considers the impact of PTAs on both the volume and variety of bilateral trade. ▶ PTAs are found to be trade-creating, increasing contemporaneous exports by around 12 percent. ▶ The trade-creating effects of PTAs are larger for smaller countries and country-pairs. ▶ PTAs impact upon trade largely by increasing the variety of products traded. ▶ PTAs have a greater impact on variety traded in larger country pairs.