Trade Creation Effects of Regional Trade Agreements: Tariff Reduction versus Non-tariff Barrier Removal
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Abstract
This paper empirically decomposes trade creation effects of regional trade agreements (RTAs) into those due to the tariff reduction effects and due to non-tariff barrier (NTB) removal by using the most disaggregated tariff-line level trade data in a large number of countries in the world. Specifically, making the full use of the fineness of our dataset, we employ the standard gravity equation and identify those effects by estimating trade creation effects of RTAs for products ineligible and eligible to RTA preferential schemes separately. Our major findings are as follows. First, for the whole samples, there are significantly positive trade creation effects due to tariff reduction while weak effects are detected for NTB removal. Second, effects of tariff reduction and NTB removal are smaller for differentiated products than for non-differentiated products. Third, trade creation effects of tariff reduction and NTB removal are substantially large in cases of trade between low-income countries while weak in cases of trade including high-income countries. Fourth, although larger tariff margins on average lead to larger trade creation effects, the relationship between tariff margins and trade creation effects is highly non-linear.
