Has CEFTA Increased Members’ Mutual Trade? Evidence with an Enlarged Set of Plausibly Exogenous Instruments

The objective of the paper is to measure the effect of the Central European Free Trade Agreement (CEFTA) in its today’s composition on members’ mutual trade. Special consideration is given to CEFTA endogeneity stemming from members’ will to form a trade bloc as a vehicle to approximate EU sooner and prevent further misunderstandings in the Balkan. We use a Conditional Mixed Process estimator whereby CEFTA is instrumented by a set of variables measuring democracy and governments’ negotiation will. The recent Conley et al. (2012) method is used to deal with only plausibly exogenous instruments. The 1996-2015 period is covered. Results suggest that CEFTA played quantitatively large and statistically significant role for its members. When endogeneity is considered, the effect of CEFTA on its members’ mutual trade is found even higher by 50% to 61%. This may indirectly suggest that CEFTA trading power has been drawn not only from countries’ GDPs and proximity, but also from their governments’ will to establish level playing field for cooperation and approach the EU quicker. However, if instruments’ strict exogeneity cannot be secured by the means of argument or statistical tools, then results suggest that CEFTA effect’s amplification may be rather driven, at least partially, by the correlation between the instrument and trade shocks.