Effects of Regional Trade Agreement to Local and Global Trade Purity Relationships

TL;DR

This paper investigates how regional trade agreements influence global and regional trade relationships by quantifying trade purity and analyzing network structures, revealing a shift towards broader, multilateral trade interactions over time.

Contribution

It introduces a trade purity indicator based on decomposing trade resistance and applies network analysis to assess RTA effects on international trade structures.

Findings

Global trade relations declined from 2007-2017.

RTAs foster trade among members, especially in EU and NAFTA.

Trade unions' influence has weakened with increased multilateralism.

Abstract

In contrast to the rapid integration of the world economy, many regional trade agreements (RTAs) have also emerged since the early 1990s. This seeming contradiction has encouraged scholars and policy makers to explore the true effects of RTAs, including both regional and global trade relationships. This paper defines synthesized trade resistance and decomposes it into natural and artificial factors. Here, we separate the influence of geographical distance, economic volume, overall increases in transportation and labor costs and use the expectation maximization algorithm to optimize the parameters and quantify the trade purity indicator, which describes the true global trade environment and relationships among countries. This indicates that although global and most regional trade relations gradually deteriorated during the period 2007-2017, RTAs generate trade relations among members, especially contributing to the relative prosperity of EU and NAFTA countries. In addition, we apply the network to reflect the purity of the trade relations among countries. The effects of RTAs can be analyzed by comparing typical trade unions and trade communities, which are presented using an empirical network structure. This analysis shows that the community structure is quite consistent with some trade unions, and the representative RTAs constitute the core structure of international trade network. However, the role of trade unions has weakened, and multilateral trade liberalization has accelerated in the past decade. This means that more countries have recently tended to expand their trading partners outside of these unions rather than limit their trading activities to RTAs.