Regional Trading Agreements and Intra-industry Trade

Abstract

Do Regional Trading Agreements (RTAs) promote intra-industry trade (IIT) ? In attempting to answer this question, previous researchers have looked at two issues: (i) whether IIT has increased following the formation of the RTA, and (ii) whether IIT is more important in intra versus extra RTA trade. To answer the first question, researchers have used movements in the value of the Grubel and Lloyd (1975, GL) index over time, while the second has been dealt with by comparing the value of the GL index for intra versus extra RTA trade. Employing the GL index in these ways to answer these questions can lead to error. In this paper, we develop a new methodology for analyzing both of these questions which overcomes this problem. First, we derive a formula which decomposes the growth in total trade (TT) into the contributions of growth in IIT and net trade (NT). Second, we show how to measure the contri bution ofinira and extra RTA trade to the growth in a country's total multilat • Address for Correspondence: Jayant Menon, Center of Policy Studies and The IMPACT Project, Monash University, Clayton, Victoria 3168, Australia. * This is a revised version of a paper presented to the 1994 NZAE Winter Conference, Zealand and the International Economy, held at Massey University. We are grateful to participants at this conference and those at a seminar at the Australian National University for helpful suggestions. We also thank Peter Lloyd, Chris Milner and two anonymous referees for comments. Any remaining errors are our own. ©1996 Institute for International Economics, Sejong Institution. All rights reserved. This content downloaded from 157.55.39.136 on Tue, 05 Jul 2016 04:58:04 UTC All use subject to http://about.jstor.org/terms Regional Trading Agreements and Intra-industry Trade eral IIT and NT. These formulas are employed to examine the effects of the Australia-New Zealand Closer Economic Relations Trading Agreement (ANZCERTA) on Australian and New Zealand trade.

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