REGIONAL TRADING AGREEMENTS: DYNAMIC PANEL DATA EVIDENCE FROM THE GRAVITY MODEL

The objective of this paper is to evaluate the determinants of bilateral trade flows among 47 countries and particularly, the effects of preferential agreements between several economic blocs and areas: European Union (EU), North-American Free Trade Area (NAFTA), Caribbean Community (CARICOM), Centro-American Common Market (CACM) and other Mediterranean countries (MEDIT) in a static and dynamic panel data framework. The period under study is from 1980 to 1999. We estimate a gravity equation in order to separate the effects of preferential agreements on intra-bloc trade, on members ’ imports from non-members and on members ’ exports to non-members and to evaluate the relevance of other determinants of bilateral trade flows such us geographic proximity, income levels, population and cultural similarities. The main aim is to investigate whether regionalism has foster intra or/and extra blocs international trade, taking into account the existence of slope heterogeneity over time and across countries and testing whether a dynamic model is preferred to the traditional static specification of the gravity model. This paper argues that the gravity model should be estimated using a dynamic panel data approach and that the best estimator is Blundell and Bond’s (1999) system-GMM estimator. This procedure remedies some econometric problems such as regressor endogeneity, measurement error and weak instruments, and controls for time-invariant country-specific effects such as distance or common language. JEL classification: F14