DOES ECONOMIC INTEGRATION INCREASE TRADE MARGINS ? EMPIRICAL EVIDENCE FROM LATIN

AMERICA

Luis Marcelo FlorensaLaura Márquez-RamosMaría Luisa RecaldeMaría Victoria Barone

Objectives• To analyze the effects of economic integration in

Latin America on the extensive and intensive margins of trade

• To distinguish– The effects of different levels of integration– Short versus long term effects– The effects on different sectors

• primary goods and agricultural manufactures • industrial manufactures• mineral fuels, lubricants and related materials

Background• A number of studies use the gravity equation to

analyze the effect of EIAs on international trade (Carrère, 2006; Magee; 2008 and Martinez-Zarzoso et al. 2009)

• Recalde and Florensa (2009), and Recalde et al. (2010) also use the gravity equation for the case of the Mercosur

• The dependent variable is the total value of exports (or imports) between two countries and the existence of EIA is modeled by including a dichotomous variable among the explanatory variables

Background

• Hummels and Klenow (2005): the extensive margin accounts for 60% of export growth in larger economies

• Hillberry and McDaniel (2003): both margins coexist in the US after the creation of NAFTA

Background• Bensassi et al. (2011): North African countries

have enjoyed a significant increase in exports associated with Euro-Med agreements, operating through the intensive margin for Algeria and Tunisia, and through both the extensive and intensive margins for Egypt and Morocco. Diverse trade patterns could be at the origin of these differences

• Baier et al. (2011): Short-term effects are reflected mainly in the intensive margin, while in the long-term the most important effect is reflected on the extensive margin. BBF did not perform an analysis considering/comparing particular integration agreements or regions

Methodology• Aspects to consider:

– Endogeneity of the EIA variables• Use of panel econometric techniques to avoid endogeneity

biases– “Multilateral resistance” terms

• Inclusion of bilateral FE, importer-time and exporter-time FE– Length of the period

• Use of panel econometric techniques to capture short versus long-term effects (1962-2005)

– Distinguish between EM and IM • Use of the methodology developed in Hummels and Klenow

(2005)

Methodology

• Xijt -- value of the aggregate trade flow from country i to country j in year t,

• Yit(jt) -- GDP in country i (j) in year t, • DISTij -- bilateral distance between the economic centers of i and j• CONTIGij --dummy variable assuming the value 1 if the two

countries share a common land border • COMLANGij -- dummy variable assuming the value 1 if the two

countries share a common language• EIAijt– indicates the level of integration between the two countries in

year t• is exporter i´s (importer j´s) non-linear and

unobservable multilateral price/resistance term. • error term.

Methodology• Extensive Margin: measure of the fraction of all products

that are exported from i to j in year t, where each product is weighted by the importance of that product in world exports to j in year t

• XmWjt -- value of world´s exports to country j in product m

in year t• MWjt -- set of all products exported by the world to

country j in year t • Mijt -- set of all products exported from i to j in year t

Methodology• Intensive Margin: the market share of country i in country

j´s imports from the world within the set of products that i exports to j in year t

• Xmijt -- value of exports from i to j in product m in year t

Methodology• Property 1: the product of the two margins equals the ratio of

exports from i to j relative to country j total imports

Where denotes j´s imports from the world.• Property 2: Taking the natural logs…

The log of the value of trade flows from i to j in the year t can be decomposed linearly into logs of the extensive margin, the intensive margin and the value of j´s imports from the world

The process of LA integration• Some important dates for the regional integration in Latin

America:

– LAIA (Montevideo Treaty, 1980) aims to establish an economic preferential system within the LA region.

• Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.

– Mercosur (Asuncion Treaty, 1991) signed by Argentina, Brazil, Paraguay and Uruguay.

– CAN (Andean Community, 1969)• Bolivia, Colombia, Ecuador and Peru

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The process of LA integration

• Chile and Mexico have signed the highest number of bilateral agreements in the region

• Chile has undergone the most far-reaching liberalization process in the Latin American region, and together with Mexico seems to have liberalized relatively more within other integration agreements such as the NAFTA and the EU, than within LAIA (Florensa et al, 2011)

• An important number of developed countries had signed non reciprocal agreements with developing countries (Generalised System of Preferences)

• 1: To study whether the EIAs signed by LAIA members have positively affected trade margins and whether the deepest EIAs have had a greater impact on trade margins.

– BBF explored the effects on the margins of trade of alternative types of EIAs and found that deeper integration agreements have a larger impact on trade flows than shallower agreements

• 2: Relative effect of EIAs on trade margins.

– BBF found that the effect of EIAs on the intensive margin is higher in magnitude than the effect on the extensive margin (in the current period)

• 3: Differential “timing” effect of EIAs on trade margins. To test whether positive effects are more persistent over time among deeper level of integration.

– BB argues that EIAs are likely to have delayed impacts on trade flows, because they are “phased-in” over 5 to 10 years, delaying the full implementation of liberalization

• 4: The effect of trade agreements differs for different sectors

– Chaney (2008) shows that the EM and the IM are affected in different directions by the elasticity of substitution. The impact of trade barriers is strong in the intensive margin for high elasticities of substitution (homogeneous products), whereas the impact is mild on the EM

• 5: Differential “timing” effect of EIAs on trade margins differs by type of product

– Effect 1: Trade margins might be more time-sensitive to changes in trade liberalization in primary goods and agricultural manufactures, as LAIA countries have a comparative advantage in agriculture

– Effect 2: Trade liberalization might be fostering the development of the industrial manufacturing sector to a greater extent in the long term.

Data• Exporting countries: Argentina, Bolivia, Brazil, Chile, Colombia,

Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela• Importing countries: 161• Period: 1962-2005• Bilateral trade flows

– Trade data for the period 1962-2000 -- NBER- United Nations trade data set (http://cid.econ.ucdavis.edu/data/undata/undata.html)

– Trade data for the period 2001-2005 -- WITS (COMTRADE) (https://wits.worldbank.org/)

– 4-digit Standard Industrial Trade Classification (SITC)• Gravity variables are obtained from CEPII (http://www.cepii.fr)• Variable of interest –the level of economic integration agreement

(source: BB (http://www.nd.edu/~jbergstr/) and WTO :– (0) there is no EIA– (1) agreement is asymmetrical or one-way (NRPTA)– (2) two-way preferential trade agreements (PTA)– (3) free trade agreements (FTA) – (4) customs unions (CU)

Model specification

Specification 1

Specification 2

Specification 3

Specification 1: All goods Specification 2: All goods Specification 2: All goods

TRADE(1) EM(2) IM(3) TRADE (4) EM (5) IM (6) TRADE (7) EM (8) IM (9)

NRPTA -0.322*** -0.043 -0.280** -0.291** -0.207** -0.084 -0.304** -0.189** -0.115L5.NRPTA -0.014 -0.013 0.000 0.003 -0.023 0.026L10.NRPTA -0.086 -0.167 0.081

PTA -0.078 0.180*** -0.258*** -0.183* -0.089 -0.094 -0.211* -0.149* -0.063

L5.PTA 0.13 0.152* -0.022 -0.054 -0.148 0.094L10.PTA -0.017 0.098 -0.115FTA 0.232** 0.112 0.120 0.085 -0.064 0.148 0.037 -0.097 0.135L5.FTA 0.09 -0.154 0.244* -0.051 -0.434*** 0.383***L10.FTA 0.619*** 0.184 0.435*

CU 0.824*** 0.351*** 0.473*** 0.585*** 0.342*** 0.244* 0.435*** 0.313** 0.122

L5.CU 0.316* -0.159 0.475*** 0.029 -0.510*** 0.539***L10.CU 0.173 -0.068 0.242Nº of obs. 39739 39739 39739 28700 28700 28700 21838 21838 21838R2 0.68 0.45 0.45 0.70 0.52 0.51 0.65 0.58 0.55

ResultsTable 1. Main results for Specification 1 and 2. All goods.

Notes: ***, **, * indicate significance at 1%, 5% and 10%, respectively. T-statistics are provided below every coefficient

ResultsTable 2. Main results for specification 3. All goods.

TRADE(1) EM(2) IM(3)

Difnrpta -0.014 0.045 -0.06

Difnrptalong 0.061 0.004 0.057

Difpta 0.141 0.134 0.007

Difptalong 0.064 -0.003 0.066

Diffta 0.189 0.042 0.147

Difftalong 0.103 -0.160 0.262

Difcu 0.269 0.206 0.063

Difculong 0.034 -0.333** 0.367*

Observations 21838 21838 21838

R2 0.40 0.49 0.46

Notes: ***, **, * indicate significance at 1%, 5% and 10%, respectively. T-statistics are provided below every coefficient

ResultsTable 3. Main results for specification 1. Sectors 1, 2 and 3.

Primary goods and agricultural

manufacturesIndustrial manufactures

Mineral fuels, lubricants and

related materials

Trade(1) EM (2) IM(3) Trade(4) EM (5) IM(6) Trade(7) EM (8) IM(9)

NRPTA 0.223* 0.066 0.157 -0.262** 0.07 -0.332*** 1.118*** 0.618** 0.501

PTA 0.259*** 0.203*** 0.056 -0.297*** 0.037 -0.334*** -0.047 0.201 -0.248

FTA 0.501*** 0.107 0.393*** 0.108 0.055 0.054 0.546* 0.445** 0.1

CU 1.113*** 0.533*** 0.580*** 0.474*** 0.042 0.433*** 1.053*** 0.924*** 0.129

Obs 33424 33424 33424 33200 33201 33200 8753 8754 8753

R2 0.67 0.45 0.39 0.77 0.53 0.53 0.66 0.54 0.55

Notes: ***, **, * indicate significance at 1%, 5% and 10%, respectively. T-statistics are provided below every coefficient

Primary goods and

agricultural manufactures Industrial manufactures

Mineral fuels, lubricants and

related materials

Trade(1) EM (2) IM(3) Trade(4) EM(5) IM(6) Trade(7) EM(8) IM(9)

NRPTA 0.131 -0.196** 0.327*** -0.292** -0.111 -0.18 1.101* 0.061 1.040**

L5.NRPTA -0.039 0.156 -0.195 0.242 0.198 0.044 -1.627** 0.149 -1.775***

L10.NRPTA -0.351* -0.239 -0.112 0.072 -0.177 0.249 -0.128 -0.092 -0.036

PTA 0.078 -0.209** 0.287** -0.418*** -0.189** -0.229* -0.164 -0.244 0.08

L5.PTA -0.229 -0.155 -0.074 0.131 0.11 0.02 -0.33 0.226 -0.556

L10.PTA 0.423*** 0.339*** 0.084 -0.155 0.058 -0.213** 0.077 0.984*** -0.907**

FTA 0.315** -0.14 0.455*** 0.017 -0.142 0.159 0.968 -0.222 1.190**

L5.FTA -0.279 -0.246** -0.034 0.141 -0.247** 0.388** 0.177 0.532 -0.354

L10.FTA 1.040*** 0.540*** 0.501** -0.085 0.138 -0.223 0.515 1.271*** -0.756

CU 0.659*** 0.234* 0.425** 0.274* 0.235* 0.039 1.041 0.65 0.39

L5.CU -0.111 -0.236 0.125 0.139 -0.372** 0.511*** -0.218 0.233 -0.451

L10.CU 0.634** 0.112 0.523** 0.05 -0.135 0.185 0.085 0.319 -0.235

Nº of obs. 17517 17517 17517 17549 17549 17549 3223 3223 3223

R2 0.62 0.53 0.43 0.72 0.66 0.63 0.71 0.64 0.63

ResultsTable 4. Main results for specification 2. Sectors 1, 2 and 3.

Notes: ***, **, * indicate significance at 1%, 5% and 10%, respectively. T-statistics are provided below every coefficient

ResultsTable 5. Main results for specification 3. Sectors 1, 2 and 3

Primary goods and

agricultural manufacturesIndustrial manufactures

Mineral fuels, lubricants and

related materials

Trade(1) EM(2) IM(3) Trade(4) EM(5) IM(6) Trade(7) EM(8) IM(9)

DIFNRPTA -0.007 -0.166 0.159 -0.151 0.141 -0.292* 0.074 0.165 -0.091

DIFNRPTALONG -0.212 0.074 -0.287 0.276 0.098 0.178 -0.722 -0.1 -0.622

DIFPTA 0.056 -0.05 0.105 -0.2 0.061 -0.261** -0.992 -0.5 -0.493

DIFPTALONG -0.19 -0.117 -0.073 0.185 0.257** -0.072 -0.207 -0.303 0.096

DIFFTA 0.067 -0.098 0.165 0.019 -0.102 0.121 0.355 -0.068 0.423

DIFFTALONG -0.161 -0.1 -0.061 0.246 -0.004 0.249 1.039 0.158 0.881

DIFCU 0.035 -0.329** 0.364* 0.11 0.136 -0.026 0.125 0.118 0.008

DIFCULONG -0.099 -0.239 0.14 0.118 -0.165 0.283 -0.07 -0.083 0.014

Nº of obs. 17517 17517 17517 17549 17549 17549 3223 3223 3223

R2 0.43 0.43 0.39 0.49 0.58 0.53 0.65 0.61 0.58

Notes: ***, **, * indicate significance at 1%, 5% and 10%, respectively. T-statistics are provided below every coefficient

Conclusions• This paper analyzes the consequences of LA integration on trade margins

over the period 1962-2005 and for different sectors.• Our results show that the signed EIAs have positively affected the intensive

and extensive margins of trade.• The deepest integration agreements have a larger impact on trade margins

than shallower ones.• The effect of EIAs on the intensive margin is higher in magnitude than the

effect on the extensive margin.• Positive effects are more persistent over time in the intensive margin than in

the extensive margin among deeper integration agreements. • Deeper EIAs have a greater effect in the case of primary goods and

agricultural manufactures in the short term.• Trade margins are more time-sensitive to regional trade liberalization in the

sector of industrial manufactures in the long term but only in PTAs.• Our results support the limited impact of shallower agreements. It seems

that further deeper agreements which may lead to greater continuity in time and depth in the level of commitment and concessions could be a good strategy to follow in Latin America.

Further research

• To analyze the effects of the different types of EIAs on other types of products and different time periods (for example, before and after the Latin American crises)

Thank you very much!