Reciprocal Trade Agreements: Impacts on Bilateral Trade Expansion and Contraction in the World Agricultural Marketplace
by Thomas Vollrath and Charlie Hallahan
Economic Research Report No. (ERR-113) 35 pp, April 2011
What Is the Issue?
Countries use bilateral/regional trade agreements to increase
market access and expand trade in foreign markets. These agreements
are called reciprocal trade agreements (RTAs) because members grant
special advantages to each other. RTAs include many types of
agreements, such as preferential arrangements, free trade
agreements, customs unions, and common markets, in which members
agree to open their markets to each other's exports by lowering
trade barriers. They have become an increasingly prominent feature
of the multilateral trading system in recent years, in part,
because of stalled global negotiations taking place under the
auspices of the World Trade Organization (WTO).
Many observers believe that RTAs deepen market integration and
complement efforts by the WTO to liberalize international markets.
While acknowledging that RTAs can open up markets, other observers
contend that these agreements also distort trade and discriminate
against nonmember countries.
Many studies have examined the degree to which RTAs increase
trade between member countries. Relatively few, however, have
attempted to quantify the extent to which RTAs curtail trade
between member and nonmember countries. In this study, ERS
empirically examines the bilateral trade expansion/contraction
effects of RTAs in the world agricultural marketplace.
What Did the Study Find?
• Model results estimate that RTA membership boosts agricultural
trade between member countries, on average, between 34 and 93
percent in the long run.
• The expansion of trade between RTA members typically comes at
the expense of trade with nonmember countries. Empirical results
show that agricultural trade falls, on average, between 26 and 46
percent in the long run between two countries when one of them does
not belong to an RTA to which the other is a member.
• The trade impacts of RTAs grow as producers and consumers
adjust to policy-induced changes in market structure and as the
implementing provisions of these agreements are phased in over
time. Models that account for the cumulative, phase-in effects of
RTAs show that, on average, agricultural trade increases 105
percent between two trading partners that belong to the same
agreement in the long run but falls 49 percent between an RTA
member country and a nonmember trading partner.
• RTAs boost trade in agricultural markets. The percentage
increase in partner trade expansion induced by mutual RTA
membership exceeds the percentage decline in partner trade
characterizing asymmetric RTA membership.
• RTAs are particularly effective at expanding agricultural
trade and opening markets in developing countries when both
developing-country trading partners are members of the same
How Was the Study Conducted?
ERS developed econometric models to isolate the impacts of RTAs
on bilateral trade in agriculture. Researchers adopted various
approaches to control for the influence of the many factors
affecting bilateral trade, such as the capacity of suppliers to
export, the size of demand in importing countries, transaction
costs, and characteristics that induce two countries to trade with
each other (e.g., differences in resource endowments). The trade
data deployed in model estimations included bilateral trade flows
reported by UN Comtrade between 69 countries covering the 1975 to
2005 time frame.
The empirical models identified statistical regularities,
controlled for the unique institutional and physical
characteristics of each country pair, and allowed for dynamic
pricing and RTA phase-in effects. They yielded quantitative
estimates of the impacts on partner trade of mutual and asymmetric