Trade Agreements in a Broader Context - Analyzing Drivers of Trade beyond Cuts in Tariffs and Non-Tariff Barriers

Abstract: The prevalence of preferential trade agreements (PTAs) continues to grow and to gain greater prominence as the agreements advance in terms of focus and reach, reflecting global changes in international trade and the world economy. Analyses of the impact of PTAs are quite frequent in academic literature, often identifying a positive impact of PTAs on trade flows, which follows economic intuition. However, there have been several papers that suggest strikingly high estimates of trade creation, predicting increases in trade flows up to 100% or more for countries entering PTAs. When trying to explain these estimated impacts on bilateral trade, most studies focus on the reduction of tariffs and the abolition of non-tariff barriers (NTBs). This paper, in contrast, ventures beyond these two drivers. Given the high estimates, there are likely additional factors at force that affect and facilitate trade, because entering into PTAs is not only likely to reduce trade costs but often also opens up new perspectives and opportunities. Employing gravity equations, this paper finds empirical evidence for the existence of additional trade stimulating factors. While controlling for tariffs and NTBs the estimates still suggest increase in bilateral trade of 16% to 42%. For identifying what some of these trade stimulating factors could be, this thesis concentrates on capital and labor. We find that both migration and FDI are driven by PTA membership. Further, foreign direct investments (FDI) are likely to be part of the trade stimulating factors, while the role of migration cannot be clearly determined.