Regional Trading Agreements and Intra-industry Trade

Regional Trading Agreements and Intra-industry Trade

Do Regional Trading Agreements (RTAs) promote intra-industry trade (IIT)? In attempting to answer this question, previous researchers have looked at two issues: (i) whether IIT has increased following the formation of the RTA, and (ii) whether IIT is more important in intra versus extra RTA trade. To answer the first question, researchers have used movements in the value of the Grubel and Lloyd (1975, GL) index over time, while the second has been dealt with by comparing the value of the CL index for intra versus extra RTA trade. Employing the CL index in these ways to answer these questions can lead to error In this paper, we develop a new methodology for analyzing both of these questions which overcomes this problem. First, we derive a formula which decomposes the growth in total trade (TT) into the contributions of growth in IIT and net trade (NT). Second, we show how to measure the contribution of inira and extra RTA trade to the growth in a country`s total multilat eral IIT and NT. These formulas are employed to examine the effects of the Australia-New Zealand Closer Economic Relations Trading Agreement (ANZCERTA) on Australian and New Zealand trade.