On the relationship between the breadth of PTAs and trade flows

Rod Falvey & Neil Foster-McGregor

#2017-038

This paper uses matching econometrics to extend the literature investigating the impact of Preferential Trading Arrangements (PTAs) on goods trade flows. Heterogeneity in PTAs is accounted for through a 'provision count index' derived from data provided in a recent World Bank study (Hofmann et al, 2017). PTA formation now involves two separate, sequential decisions - first, whether two trading partners should form a PTA and, second, if they do, how broad that agreement should be. We find that our explanatory variables are significant for both decisions, but often have opposing effects on each. Using our matched PTA and non-PTA groups of country-pairs, we estimate a dose response function which indicates that arrangements with few provisions and arrangements with many provisions do not appear to have a significant impact on goods trade flows between their members. PTAs in an intermediate range are shown to have a significant positive effect. We then relate these outcomes to the actual content of the PTAs using the concept of 'provision intensity'.

Keywords: Preferential Trade Agreements, Trade Flows, PTA Breadth

JEL Classification: F10, F15