Regional Trade Agreements in Mediterranean Area: Econometric Analysis by Static Gravity Model

Abstract

Since the mid-1980s, there was the rise of a new wave of economic regionalism in the world economy with the spread of free trade agreements (FTAs). A key objective of free trade involves developing commercial exchanges between member countries. The gravity model is a vital tool to explain the bilateral trade data against the variables of the relative size of the pair of countries implicated in the trade: distance, common border, and language and models for each of the FTAs. This article focuses on studying the influence of FTAs in the Mediterranean countries in which we integrate the role of regional dummy EU (15), EMU (euro zone), the AMU and AGADIR agreement in trade flows. The use of regional variables are designed to determine whether its FTAs contribute to the creation of trade diversion. This study examines a cross-section and panel of 27 countries for 1980–2011. The results show the existence of a strong relationship between the factors of FTAs and trade flows.

KEYWORDS:

• FTA
• gravity models
• regional trade blocks

Notes

Note. The values in parentheses are t-statistics.

*Significant at 10% level; **significant at 5% level; ***significant at 1% level.

Note. The values in parentheses are t-statistics.

^a Without regional variable.

^b With regional variable.

*Significant at 10% level; **significant at 5% level; ***significant at 1% level.

This is an agreement between two or more countries or economies to form an FTA. An FTA is a group of countries in which tariff and non-tariff barriers to trade among members are usually removed but not with common commercial policy toward non-members.

The international trade flows are often seen as indicators of links between the economic centers of the region, which shows the connections between economic and spatial units.

See Eichengreen and Irwin (1998), Feenstra (1998), and Estevadeordal, Frantz, and Taylor (2002) for details.

They are expressed by trade barriers tariff or non-tariff barriers, different languages, differences in business cultures, traditions, and economic systems.

See appendix table A1: summary of empirical works relating to effects of FTAs on trade flows.

The countries are listed in appendix table A2.

See appendix table A3: name and sources of the variables used.