This paper argues that the competitive liberalization of national governments of the past several decades has created a market for regional economic integration agreements (EIAs). Evidence shows that countries that have selected into EIAs such as free trade agreements have chosen well in the sense that the same economic characteristics that explain and predict bilateral EIAs also explain and predict bilateral trade flows. We show that previous ex post empirical evaluations of the effects of EIAs on trade have tended to underestimate the effects due to ignoring the (endogenous) self-selection bias of country pairs into EIAs. Accounting for this bias, we find that European economic integration had a much larger impact on trade over the period 1960-2000 than previously found, and other more recent EIAs have had economically and statistically significant effects on members trade. The results shed further light on understanding the causes and consequences of the growth of regionalism.
SSRN URL (abstract only): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1116415