Trade Creation and Diversion: a cross-commodity gravity analysis of EU, Canada and selected countries.

Abstract

Based on a gravity equation, the aim of this dissertation is to examine the short-run trade effects originating from the Comprehensive Economic and Trade Agreement (CETA) entry into force between European Union (EU) and Canada. More precisely, to investigate trade-creation and diversion effects (increase and reduction of the economic welfare) arisen from trade redirection, at the global level. The variation is explored considering bilateral trade flows between the involved countries in ten groups of agricultural and industrial products, over a ten years time span (2010-2019): this is done by including in the gravity model the flows in commodities between CETA member countries (EU-CAN) as well as those between EU and selected non-member countries (EU-Country i), where Country i represents the main commercial partners of the EU. In parallel, trade theories, patterns and dynamics are deepened. The analysis showed that: regionalism surpassed the World Trade Organisation (WTO) multilateral system by bringing the commercial framework to a higher level of integration and efficiency; trade creation effects are widely dominant over trade diversion ones, especially within the CETA countries’ industrial sectors and within non-CETA country-pairs that share a regional trade agreement; the post-agreement CETA member countries’ trade potential is overall negative and thus their aggregate trade flows are performing over expectations for the majority of the concerned commodities. The main critical issues are inherent to negative externalities, to the detriment of small-scale industries, food safety, healthcare, biodiversity, climate variability and change.