New Measures of Trade Creation and Trade Diversion,” mimeo

This paper uses a panel data set to estimate the effects of regional agreements on trade flows controlling for country pair, importer-year, and exporter-year fixed effects. These fixed effects capture all of the determinants of trade flows normally included in gravity model specifications as well as controlling for yearly shocks that affects countries ’ trade levels. In most cases, controlling for the fixed effects greatly reduces the estimated impact of regional agreements on trade. The estimates reveal that the average regional agreement has significant anticipatory effects on trade flows and continues to affect trade for up to 11 years after the trade deal begins. Customs unions influence trade over a longer period of time than do free trade areas. Finally, the paper shows that a trade agreement often has very different impacts on each of the countries involved and presents estimated trade effects for individual countries in year five of the agreements