Trade Creation and Diversion Effects of Europe’s Regional Liberalization Agreements

Abstract

After a short background on recent developments in gravity modelling and liberalization agreements in Europe, this paper measures the trade creation and diversion effects of major European agreements based on the results of a correctly specified triple-indexed gravity model with bilateral fixed effects. For each agreement and partner country, welfare implications are discussed in sectors of different factor intensities with emphasis on the role of similarity in income or relative factor endowments between partners, as well as the date and the reciprocity of the agreement. This is followed by a description of the characteristics of the non-partner countries that are affected by these agreements in each sector.