Trade Creation and Diversion Effects of Regional Trade Agreements: A Product-level Analysis


  • The authors are grateful for the comments received from Mitsuyo Ando, Shiro Armstrong, Masahisa Fujita, David Greenaway, Helan T. Naughton, Katsuhide Takahashi and Ryuhei Wakasugi. This research was conducted as a part of a project entitled ‘FTA study’ for the Research Institute of Economy, Trade and Industry.


This paper examines the impacts of regional trade agreements (RTAs) on trade flows at product level, with a particular focus on trade creation and diversion. Based on estimation of the gravity equation, dealing with the zero trade flows and endogeneity bias problems, we analyse the impacts of various types of RTAs involving 67 countries for 20 products during the 1980–2006 period. We find that RTAs among developing countries tend to cause trade diversion compared with RTAs among developed countries. Taking the higher external tariff rates of developing countries compared with developed countries into consideration, our results suggest trade diversion is likely to be caused by remaining high tariffs on imports from non-members. In addition, we find the trade creation effect for many products in the cases of Customs Unions and plurilateral RTAs. These results imply that trade creation would be caused by various factors besides the reduction in tariff rates. Based on these results, we draw a policy implication that external tariff rate reduction is an important factor in avoiding trade diversion in the formation of RTAs, in particular for RTAs among developing countries, while a large number of members and the common external tariff appear to be important for generating the trade creation effect.