The 1990s marked the beginning of a period of proliferating regional trade agreements (RTAs) around the world. This dissertation analyzes the effects a RTA in South America, Mercosur, has had on Paraguayan import flows. The analyses are carried out at both aggregate and disaggregate levels of detail in order to identify patterns of trade creation and trade diversion on the Paraguayan economy as a whole, as well as more detailed commodity levels. Mercosur (Common Market of the Southern Cone) was signed in 1991 between Argentina, Brazil, Paraguay, and Uruguay. It is well know that the share of foreign trade with respect to GDP is larger for small countries. Consequently, the effects of a trade agreement between large and small countries are likely to be larger in small economies.
In the first chapter, I use a variant of the gravity model employing a re-parameterization of the difference-in-difference estimator to analyze Paraguayan import values of merchandise from 155 countries over a 41 year period (1970-2010), at the single digit level of detail (SITC Rev. 1). Additionally, I explicitly include zero trade flows and implement a Heckman sample selection bias correction with country fixed effects. I find the creation of Mercosur has increased average regional imports by 266% since 1995 without decreasing imports from the rest of the world, which is evidence of trade creation. The greatest import expansions have been in Beverages & Tobacco and Animal and Vegetable Oils & Fats.
In the second chapter, the sensitivity of the estimates are tested by comparing the results of the traditional OLS estimator and the Heckman sample selection approach to a recently recommended technique in the literature, the Poisson Pseudo-Maximum-Likelihood (PPML) estimator. The specification of the three estimators is implemented using country fixed effects panel analysis of the same data and period. I include additional refinements such as real exchange rate data and controls for major macroeconomic and political shocks. I also test the sensitivity of the estimates to varying sample sizes. Finally, the dissertation analyzes the dynamic time path effects of Mercosur on Paraguayan import flows in an interval analysis. Qualitatively, the results of great trade creation and no trade diversion are consistent across the estimators and the sample sizes. Quantitatively, the Poisson measures of trade creation are well below those of the other two techniques and even reveal some evidence of small trade diversion when the specification is estimated on Paraguay’s 19 major trading partners only.
University of Minnesota Ph.D. dissertation. August 23012. Major: Applied Economics. Advisor: Terry Roe. 1 computer file (PDF); viii, 67 pages, appendix p. 62-67.
Gunther, Victor Federico Gauto.
An econometric analysis of trade creation and trade diversion in mercosur and Paraguay.
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