On the Dynamics of Trade Diversion: Evidence from Four Trade Blocs

Caroline L. Freund · John McLaren

67 citations0/0 files storedInternational Finance Discussion Paper

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Global trade and economics International Relations in Latin America Global Political and Economic Relations

Abstract

This paper studies the dynamics of trade reorientation experienced when a country joins a regional trade bloc. We find that the joining country's trade orientation toward bloc countries typically rises along an 'S'-shaped path. We estimate the size, speed, and timing of this adjustment path for a 'typical' joining country, for four trade agreements. We find that, in the European Union (EU), the incumbent bloc countries' share of the joining country's trade typically rose by eighteen percentage points over the course of the adjustment; that this took twelve years; and that the adjustment began four years before the date of accession. MERCOSUR shows a similar pattern in progress, but NAFTA and EFTA are more idiosyncratic. We argue that the data provide strong evidence of anticipatory sunk investments made to prepare for accession.

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References

1992Earnings Losses of Displaced Workers 1998The Value of Trade Agreements in the presence of Political pressures 1978Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model 1997The Role of History in Bilateral Trade Flows

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