Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
962824 | Journal of International Economics | 2007 | 24 Pages |
Abstract
For over 40Â 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. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members' bilateral trade after 10Â years.
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Authors
Scott L. Baier, Jeffrey H. Bergstrand,