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Y. KURIHARA

In these cases, the slope of the bilateral trade-GDP re-

lationship may change when RTAs ar e adopted. It is very

natural to think so. Moreover, to the extent that trade

integration encourages greater production specialization,

RTAs might permit the exploitation of economies of

scale in transportation; information, communication and

technology (ICT); and so on, changing the slope of the

bilateral trade relationship.

As noted in [11], as existing RTAs are deepened and

new ones are being negotiated, it will be important to

ensure that trade creation dominates trade diversion. It is

therefore essential to examine the effects of RTAs.

This article is organized as follows. The next section

shows theoretical analysis on this issue. Section 3 dem-

onstrates the empirical methods and the data used here.

Section 4 shows the results and performs additional ana-

lysis on the results of previous section. Finally this paper

ends with a brief summary.

2. Theoretical Analysis and Empirical

Methodology

This paper’s fixed effect model is similar to [12,13].

ln(TRADEijt) = a0RTAijt + a1ln(YiYj) + a2ln(P CiPCj) +

a3CUijt +μij + εijt (1)

where i and j are countries (units), TRADE is the value

of bilateral trade, RTA is a dummy variable that is unity

if countries belong to the same regional trade agreement.

Y is the product of their real GDP, PC is the product of

real GDP per capita, CU is a dummy variable that equals

one if these countries use the same currency. Finally, μ is

the country-pair fixed effects. μij assumes that μij = μji;

the fixed effects do not depend on the direction of inter-

national trade. Panel data for all over the world is used

except for missing cases.

RTAs nonlinear effects may arise as a result of selec-

tion into agreements for international trade by countries

that tend to be small, poor, and remote. The impact of a

change in RTA condition or slope coefficient is exam-

ined in the next section.

I used th e panel data for OECD and non-OECD coun-

tries. The sample data are from 1985 to 2009. All the

data are yearly. RTAs and member countries were ob-

tained from the membership of proliferation of regional

trade agreements by the WTO. All other data are from

International Financial Statistics (IMF), World Devel-

opment Indicators (World Bank). Finally, if there were

insignificant variable(s), I omitted this (these) variable(s),

estimated again, and computed the RTAs’ effects on in-

ternational trade

3. Estimated Results and Revised Estimation

The results of Equation (1) are shown in Table 1.

The results are almost as expected. Colu mns (1) an d (4)

in Ta ble 1 show that the estimated coefficient for RTA is

0.815 (OECD) and 0.798 (non-OECD). Both are positiv e

and significant. RTAs certainly promote international

trade. It is interesting to note that the effect is bigger for

OECD countries than for non-OECD countries.

The effects of nonlinear RTAs may arise as explained

in the previous section. Next, quadratic terms of ln(YiYj)

and ln(PCiPCj) are added as in [13], for the case of cur-

rency integration. Th e results are in columns (2) and (5),

which demonstrates that both variables are positive and

significant and confirms nonlinearity. The analysis is

performed later.

I investigated the impact of a change in the condition

of the RTAs by adding the following interaction terms: 1)

RTA and ln(DISTij), where DISTij is the distance be-

tween countries, 2) RTA and ln(YiYj), and 3) RTA and

ln(YPCiYPCj). The quadratic terms and the interaction

term of RTA and ln(YiYj) are significant at the 1% level;

the introduction of RTAs changes the relationship be-

tween tra d e and GDP in OECD and non- O ECD co un tr ies .

On the other hand, the changes in relationships between

trade and GDP per capita and trade and distance are not

significant.

It is interesting to note that the relationship between

international trade an d distance is insignificant in OECD

countries; however, they also are significant in non-

OECD countries. As transportation system and ICT im-

prove, the effect of distance on international trade may

decrease. In OECD countries, distance is still an impor-

tant factor in the promotion of international trade.

I excluded the insignificant variables and computed

the effect of the RTAs. The calculation equation is as

follows [13]:

RTARTA ln()

RTAEFFECT expln1

ij

ijtY Yij

aa YY

(2)

The equations shows how the RTAs effects (RTAEF-

FECTijt) are distributed where both countries are mem-

bers of the same RTAs (i.e., RTAijt = 1). The results are

0.780 for OEC D a nd 0.7 1 3 fo r no n- OECD countrie s.

There is high possibility that RTAs do not reduce bi-

lateral trade if a large country is involved. However, it

should be noted that although some country pairs ex-

perience substantially higher levels of trade when they

share a common RTAs, for a significant subset of coun-

try pairs, members of RTAs are associated with a lower

level of bilateral trade. How RTAs promote international

trade depends on the constitutio n of the pair of countries.

RTAs surely promote international trade; however, the

proportion is not necessarily proportional. Each country

should consider this fact and use it effectively to gain

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