Reciprocal Trade Agreements: Impacts on U.S. and Foreign Suppliers in Commodity and Manufactured Food Markets
by Thomas Vollrath, Jason Grant, and Charlie Hallahan
Economic Research Report No. (ERR-138) 40 pp, August 2012
What Is the Issue?
Reciprocal trade agreements (RTAs) between two or more countries
offer an alternative approach to lower trade barriers than that
provided through multilateral negotiations of the World Trade
Organization (WTO). But because RTAs grant preferential
cross-border treatment to member countries, they may distort
markets and divert trade from nonmember exporters. This study
focuses on two agricultural subsectors-commodity foods and
manufactured foods-and quantifies the extent to which RTAs have
expanded trade between member countries and altered trade between
member and nonmember countries.
Most applied research on RTAs has examined the effects on
intra-bloc trade, or trade between partners belonging to the same
trading bloc. This study examines the impacts of 11 RTAs on both
intra-bloc trade and extra-bloc trade, or trade between member and
nonmember countries. The study also differentiates between the
effects on the United States as a nonmember exporter and
the effects on other nonmember competitors.
What Did the Study Find?
Given that international policy dynamics make negotiating a
multilateral trade agreement difficult, countries have used RTAs as
a practical and feasible route to gain greater access to foreign
markets. These agreements have affected the pattern and volume of
• RTA membership increased trade in most commodity and
manufactured food markets during the 1975-2005 period. However, in
some cases, the increase in intra-bloc trade came at the expense of
a shift in imports away from nonmember food exporters.
• Not surprisingly, the rise in exports to partner markets was
particularly pronounced when the exporter and the importer were
members of the same RTA. For example, the formation of the European
Union (EU) induced an expansion of intra-EU trade in manufactured
foods and commodity foods of 93 and 95 percent, respectively,
between 1975 and 2005. This growth equates to an average annual
increase in food trade between EU countries of 3 percent per
• The rise in intra-bloc trade within the North American Free
Trade Agreement (NAFTA) and the Closer Economic Relations (CER)
agreement was, in contrast to that within the EU, substantially
greater for manufactured foods than for commodity foods. Between
1989 and 2005, trade between NAFTA members expanded 6 percent per
year, on average, in manufactured foods and 3 percent per year in
commodity foods. Over the same period, trade between CER members
Australia and New Zealand increased 14 percent per year in
manufactured foods and 3 percent per year in commodity foods.
• Empirical results also show that bloc-member exports often
expanded to nonmember markets following the start of the agreement.
This finding supports the view that RTA liberalization often spills
over into other markets, increasing member exports to nonmember
importers. Given that RTAs grant preferential treatment to members,
the rise in extra-bloc trade was understandably less than the
increase in intra-bloc trade (with the exception being extra-bloc
trade involving members of the Association of Southeast Asian
Nations Free Trade Agreement, or ASEAN).
• In some markets, nonmember exporters of food bore the cost of
RTA formation. Members of ASEAN, the EU, the Common Market for
Eastern and Southern Africa (COMESA), the Greater Arab Free Trade
Area (GAFTA), and the South Asian Preferential Trade Arrangement
(SAPTA) were found to have lowered food imports from extra-bloc
exporters following implementation of the agreements. The adverse
effects of four of these RTAs were more pronounced for the United
States than for other nonmember exporters. COMESA diverted trade in
commodity foods away from non-U.S. exporters, but it did not
curtail imports of food from U.S. suppliers.
How Was the Study Conducted?
ERS adopted the gravity framework and estimated benchmark and
generalized equations to quantify the effects of 11 specific RTAs
on intra- and extra-bloc trade in commodity and manufactured food
markets. Data used in the applied analysis include 31 years of
bilateral trade flows and selected socioeconomic characteristics of
69 countries and all partner pairs covering the 1975-to-2005
timeframe. To isolate the dimensions of trade creation and trade
diversion attributable to each of the RTAs, the benchmark models
accounted for such factors underlying trade as bilateral exchange
rates, relative factor endowments, transportation costs, and
membership/nonmembership in the various RTAs. The generalized
models incorporated country-pair effects. By fixing these effects,
the generalized equations embody nonobservable factors affecting
trade. Both theory and statistical criteria were used to
and identify the preferred analytical approach.