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New report: Economic integration works

2018-07-10

A new report from the National Board of Trade Sweden shows that regional trade agreements stimulate trade effectively. Customs unions and other deep integration agreements have the strongest trade effects.

Since the early 1990s, there has been a sharp increase in regional trade agreements. Today, they are a familiar part of the world trading system. Given the importance of regional trade agreements for today’s global trade, it is surprising that relatively little solid information is available regarding their effects. In recent years, however, scholars have made significant progress in estimating the trade effects of regional trade agreements. In an effort to compile the new evidence in an easily accessible format, the National Board of Trade Sweden now publishes a review of the most recent research.

On average, regional trade agreements double members’ trade in goods after a phase-in period of ten years. In all surveyed studies, the average trade increase of RTAs after ten years was in the range of 50–170 percent. Eight of twelve surveyed studies reported average trade increases in the range of 80–125 percent.

The trade effect of RTAs increases with depth and enforceability. Whereas preferential trade agreements only have modest effects on trade, free trade agreements have substantial trade creating effects. Customs unions and even more ambitions forms of RTAs have the strongest trade effects.  The range of estimated trade effects was 30–110 percent for free trade agreements and 100–250 percent for customs unions and other forms of deep economic integration. One potential explanation for the strong customs union effect compared with free trade agreements is that trade within a customs union is simpler and requires less red tape.

The central conclusion in the report is that economic integration works if the objective is to increase trade. Most importantly, it is when countries make commitments – not when they avoid them by defending their defensive interests – that regional trade agreements help them increase trade. The most surprising findings in the review were the magnitude in the overall empirical effects compared to model estimations, the absence of substantial trade-diversion effects and a large difference between the effects of customs unions and free trade agreements.

In the future, more precise estimates of individual regional trade agreements would be welcome. As the next step, the National Board of Trade intends to make additional gravity-based empirical analysis of the effects of EU RTAs with other economies.

Read the report here:
Economic integration works – The trade effects of regional trade agreements

Read a summary in Swedish here:
Handelseffekter av bilaterala och regionala handelsavtal

For more information, please contact:
Senior Advisor Per Altenberg, per.alt...@kommers.se, +46 73 424 49 26.

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National Board of Trade, P.O. Box 6803, SE-113 86 Stockholm. 
Visiting Address: Drottninggatan 89. 
Phone: +46 8 690 48 00     Fax: +46 8 30 67 59

E-mail: kommersk...@kommers.se

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