Measuring trade creation effects of free trade agreements: Evidence from wine trade in East Asia

Abstract

East Asia has experienced an unprecedented expansion in its wine market over the past two decades. This paper examines the extent to which import tariff reductions through bilateral free trade agreements (FTAs) have contributed to an increase in wine imports to Japan, China, and South Korea. Our empirical method involves estimating an augmented version of the gravity equation by the Poisson pseudo-maximum likelihood (PPML) technique. Analyzing a panel dataset for 1990-2016 covering 27 exporters, we find that overall a 1 percentage point reduction in tariff among FTA member countries is associated with an increase in the wine import volumes by 0.042%, which is seven times higher than a similar reduction in tariff on an MFN basis. The strongest trade creation effects are founded for bottle wine. The results are robust to various specifications.

Keywords: wine trade, FTAs, non-tariff barriers, gravity equation

JEL classification: F14, F69, L66 Show more