500. Can Trade Agreements Curtail Trade Creation and Prevent Trade Diversion?

Juyoung Cheong, Do Won Kwak, and Kam Ki Tang, School of Economics Discussion Paper No. 500 February 2014, School of Economics, The University of Queensland.

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Abstract

Despite recent theoretical literature highlighting the cross effects between preferential trade agreements (PTAs), like the “domino effect” and the “competitive liberalization” theory, little has been done to quantify their impact on bilateral trade flows. This paper investigates how preexisting PTAs dilute (shield) the trade creation (diversion) effect of new PTAs. Countries having pre-existing PTAs enjoy smaller gains in intra-bloc trade because of the dilution effect, and experience smaller losses/ or even gains in extra-bloc trade because of the shielding effect. The findings support the proposition that PTAs could be used to fend off future trade diversion.