The Effects of Regional Trade Agreements on Trade Flows: A Structural Gravity Equation Analyses

Regional trade agreements have markedly increased over the past few decades. Almost every country participates in one or more regional trade agreements, and the depth and complexity of these signed agreements have also increased. Since the development of Viner's classic customs union theory in the 1950s, there has been considerable research on the effect of regional trade agreements on international trade volume. Still, the findings have been varied and mixed. This article analyses the partial effect of regional trade agreements on trade volume, tracing the advancements in gravity and economic integration literature from Tinbergen's initial research to the present day. In this context, by using international and intranational trade data, this article uses the gravity equation with the PPML estimation method to reveal the effect of regional trade agreements on trade flows for the 1966–2020 period. According to the results, besides international trade flows intranational trade flows and globalization are essential components when estimating the effects of regional trade agreements. Additionally, the findings show that the European Union, being one of the deepest and oldest economic integrations, considerably increases the bilateral trade compared to a standard regional trade agreement. Therefore, the policies implemented by the European Union in this context could serve as a guiding example for free trade agreements that other countries might sign.