Exploring the Impact of Economic Integration Agreements Through Extreme Bounds Analysis

This paper provides an empirical strategy guided by the data to estimate the dynamics and effects of Economic Integration Agreements (EIAs) on trade flows. The strategy uses Extreme Bounds Analysis (EBA) to guide the choice of lags and leads in the effects without researchers' discretion involved. We show that arbitrarily selected year intervals and starting year can result in non-robust estimates of transitional dynamics of the effects of EIAs on trade flows. The empirical strategy follows two steps: EBA firstly sifts lags and leads of EIAs robustly related to trade flows from candidates, then these are included in the gravity equation to estimate the effects of EIAs on trade. We find that various lags and leads are robustly and positively related to trade flows, and the lag and lead structure depends on the level of integration. Our results show that EIAs have a long-term effect of 64% on trade flows. Under the richer lag and lead structure, deep-integration agreements beyond the level of free trade agreements have a much higher impact on trade flows than free trade agreements do (112% versus 33%). The estimates of effects of EIAs obtained from EBA-based estimation have a smaller contemporaneous effect and larger phasedin effects compared to previous studies relying on the subjective choices of year intervals while similar results are observed with the decomposed EIAs.