Trade creation and trade diversion of economic integration agreements revisited: a constrained panel pseudo-maximum likelihood approach

For PPML estimation of high-dimensional structural gravity panel models it proves useful to exploit the equilibrium restrictions imposed by the system of multilateral resistances. The main advantage of this approach lies in the functional dependence of the parameters of all dummy variables on the structural trade cost parameters. Moreover, the delta method is used to establish confidence intervals of counterfactual changes. Using the constrained panel PPML estimator for a panel of 65 countries in the period 1994-2012 indicates significant trade creation of economic integration agreements with average ranging in between 12.2 and 30.3% in 2012. Results also point to substantial domestic and international trade diversion, where the former dominates the latter.