A Gravity Model Analysis of the Benefits of Economic Integration in the Pacific Rim

A Gravity Model Analysis of the Benefits of Economic Integration in the Pacific Rim

A modified gravity model of international trade is used to evaluate determinants of flows of commodities most often traded in the Pacific Rim. It is shown that the gravity model can be reparameterized effectively by using time series and cross section data rather than using cross section data alone. Documented evidence indicates that all independent variables including income, export and import unit values, exchange rates, and membership in regional trade groups are major determinants of trade flows in the Pacific Rim. Specifically, membership in the ASEAN significantly increased trade creation among members as well as fostered trade diversion from members to nonmembers. However, the impact of membership in the NAFTA on trade flows in the Pacific Rim is limited and appears to be commodity specific. (JEL Classifications: F15, F14, F02)