This paper examines how dissimilarity of partner country characteristics affects the change in trade flows under a preferential trade agreement (PTA). Our results show that the more similar the partner countries are, the larger the increase in intra-bloc trade is under a PTA. Particularly, there is a substantial "development neighborhood premium": the gain for developing countries from a PTA among themselves is about two and a half times that from partnering with industrial countries. Our findings challenge the perception that by becoming more integrated with industrial countries, developing countries could automatically gain access to a much larger and lucrative export market.
- Gravity model
- Preferential trade agreements
- Trade creation
ASJC Scopus subject areas
- Geography, Planning and Development
- Sociology and Political Science
- Economics and Econometrics