Theory and Methods Research Paper 2006 / 14 The Trade Structure Effects of Endogenous Regional Trade Agreements

This paper formulates an empirical model to estimate the impact of endogenous new RTA membership on trade structure. The likelihood of new RTA membership is influenced by economic fundamentals such as country size, factor endowments and trade and investment costs. In a sample of country-pairs covering mainly the OECD economies we find a particularly strong effect of endogenous RTAs on intra-industry trade in a difference-in-difference analysis based on matching techniques. We identify an RTA-induced impact on the intra-industry trade share of about 40 percent of its average level. The associated trade volume effects are similar to previous research on trade volume effects of endogenous RTAs. Overall, this indicates that RTA membership might reduce inter-industry trade not only in relative but also in absolute terms and that the trade volume effect is due to the associated growth in trade within industries.