On the trade-diversion effects of free trade agreements

Standard trade theory suggests that Free Trade Agreements (FTAs) could disrupt trade between members and non-members. However, the trade diversion effects of FTAs have not been thoroughly examined empirically. Using a novel empirical approach, we confirm that FTAs that entered into force during the 1990s diverted trade away from non-member countries. Interestingly, we find that diversion from internal trade due to FTAs was significantly stronger than diversion from external trade.