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Economic Integration and the two margins of trade: An application to the Euro-Mediterranean agreements

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  • Bensassi, Sami
  • Márquez-Ramos, Laura
  • Martínez-Zarzoso, Inmaculada

Abstract

According to trade theory, preferential trade agreements increase international trade through a reduction in artificial trade barriers. In recently developed models with imperfect competition and heterogeneous firms, lower trade costs increase bilateral trade through an increase of the number of exporting firms (the extensive margin of trade) and a rise in the mean value of individual shipments (the intensive margin of trade). In these models, the influence of trade costs on bilateral trade results from a combination of three parameters, which affect both margins: the distance elasticity of transportation costs, the price elasticity and the degree of firm heterogeneity. In this paper, a decomposition of a structural gravity equation derived from Chaney’s (2008) model is presented. Using highly disaggregated export data for seven countries (Algeria, Egypt, Jordan, Lebanon, Morocco, Syria and Tunisia) between 1995 and 2008, we estimate the impact of the recently signed trade agreements with the EU on both trade margins and we provide empirical evidence of the validity of the theoretical predictions.

Suggested Citation

  • Bensassi, Sami & Márquez-Ramos, Laura & Martínez-Zarzoso, Inmaculada, 2010. "Economic Integration and the two margins of trade: An application to the Euro-Mediterranean agreements," Conference papers 331930, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331930
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