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WORKING PAPER 07-1

The Trade Effects of Preferential Arrangements: New Evidence from the Australia Productivity Commission

by Dean A. DeRosa, Peterson Institute for International Economics

Do preferential trade arrangements (PTAs) create or divert trade? An Australia Productivity Commission study assesses large PTAs such as NAFTA, the European Union, Mercosur, as well as smaller PTAs such as the Andean Group using gravity models and Tobit regressions and suggests that major PTAs are trade diverting while minor PTAs are trade creating. Using an augmented Rose gravity model, the author challenges the APC’s results by first measuring the 20 PTAs in the APC study and then expanding to include nearly 46 PTAs in total. While the author does not fault the APC’s methodology, he concludes that most current PTAs are trade creating and that there is no uniform evidence of trade diversion.

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