Measuring trade creation effects of free trade agreements: Evidence from wine trade in East Asia

Abstract East Asia has experienced an unprecedented expansion in its wine market over the past two decades. This paper examines the extent to which import tariff reductions through bilateral free trade agreements (FTAs) have contributed to an increase in wine imports to Japan, China, and South Korea. Our empirical method involves estimating an augmented version of the gravity equation by the Poisson pseudo-maximum likelihood (PPML) technique. Analyzing a panel dataset for 1990–2016 covering 27 exporters, we find that overall a 1 percentage point reduction in preferential tariff rates led to an increase in the log wine import volumes by 0.042%, which is seven times larger than the effects of most-favored-nation (MFN) tariff reductions. The strongest trade creation effects are founded for bottle wine. The results are robust to various specifications.