European Parliament Library

Trade Creation and Diversion Revisited :, Accounting for Model Uncertainty and Natural Trading Partner Effects, Chris Papageorgiou, Christian Henn, Theo Eicher

Trade theories covering Preferential Trade Agreements (PTAs) are as diverse as the literature in search of their empirical support. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. BMA minimizes the sum of Type I and Type II error, the mean squared error, and generates predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we report clear evidence of Trade Creation, Trade Diversion, and Open Bloc effects. After controlling for natural trading partner effects, Trade Creation is weaker - except for the EU. To calculate the actual effects of PTAs on trade flows we show that the analysis must be comprehensive: it must control for Trade Creation and Diversion as well as all possible PTAs. Several prominent control variables are also shown to be robustly related to Trade Creation; they relate to factor endowments and economic policy
Table Of Contents
Contents; I. Introduction; II. Methodology; A. The Empirical Framework; B. Theory and Model Uncertainty in the PTA Literature; C. Accounting for Model Uncertainty through Bayesian Model Averaging (BMA)..; III. Data; IV. Results; A. PTA Trade Creation/Diversion: Differences due to Methodologies; B. PTA Trade Creation/Diversion: Accounting for Natural Trading Partners; C. Quantifying PTAs' Open Bloc and Trade Creation Effects; D. Beyond PTAs: Trade Creation/Diversion and Economic Policy/Factor Endowments; V. Conclusion; Tables; 1. Preferred Trading Arrangements
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (32 p.)
Specific Material Designation
Form Of Item

Library Locations

  • EP Library Brussels

    60 rue Wiertz, Brussels, B-1047, BE
  • EP Library Strasbourg

    7 Place Adrien Zeller, Allée du Printemps, Strasbourg, F-67070, FR
  • EP Library Luxembourg

    Rue du Fort Thüngen, Luxembourg, L-1313, LU