The Trade Impact of European Union Preferential Policies: An Analysis through Gravity Models

This book brings together work from numerous authors covering European Union (EU) trade policies towards developing countries and the empirical study of their effect on trade flows. In doing so, it relies solely on the use of the gravity model for analysis. This role, worthy of a work horse, is an interesting approach and also allows one to set this book into a much broader literature on the specifications of the gravity model and recent developments surrounding it. The path chosen can speak to several kinds of readers, interested in the policies themselves and empirical results of their effects, or looking for guidance in econometric gravity model applications. The central theme of the book is the appropriate measurement of preference margins and how to capture the trade effects of such policies. This is in large an exercise of identifying true average treatment effects, while lacking the setting to do so. Many advances have been made in this field recently, some by the authors and editors themselves. To this end, the book takes the long tour, by presenting the individual policies and the gravity model itself before getting into the data. A chapter on the Mercantilist Trade Preference Index provides the reader with a theoretically founded method to gauge the extent of preferences given towards developing countries which can be useful in trade negotiations. Some of the ‘new’ problems in gravity model estimations apply especially to trade with developing countries warranting the broad approach taken by this book. Central issues are the presence of zero trade flows, which are more common when trading partners are developing countries, and the measurement of trade creation along the margins of trade which have clear development implications. The ‘selective grand tour’ of the gravity model in chapter 4 feeds the later chapters with the necessary theory and a discussion of econometric issues that are picked up on throughout. A subsequent meta-analysis shows the broad range of results that have been found on the study of preferential trade and sums up what is intuitively clear: preferential trade agreements increase bilateral trade (Baier and Bergstrand, 2007). From there, the reader is taken from meta to micro and direct applications to disaggregated trade data.