Do Trade Agreements Actually Reduce Trade Volatility?

Abstract

A frequently stated objective of regional and multilateral trade agreements is to stabilize trade and reduce volatility in trade flows. We examine whether trade agreements accomplish this goal. Using a structural gravity approach we identify two potential channels through which international trade institutions may influence the volatility of bilateral trade flows: by affecting the variance of trade barriers and by affecting the covariance of economic outcomes between the trading partners. We then use a panel of bilateral industry-level trade data to empirically examine the effects of regional trade agreements and GATT/WTO membership on export earnings volatility. We find some evidence that joining a multilateral trade agreement such as the GATT does make export earnings less volatile. However, regional trade agreements increase measured volatility in bilateral exports, and this rise in volatility increases as the agreement becomes deeper and more integrated.