BUS613: Advanced International Business

Other than common characteristics like the total trade volume or the absolute values of imports or exports studied in previous works, the TI also captures indirect trade effects. Such indirect effects arise, for instance, if a customer increases its output, being likely to demand more input that is required for the production of its goods. This increase in demand, in turn, affects the business of the supplying industry at the input side. Capturing effects at both, demand and supply side individually, TI can be defined in each direction and thus allows distinguishing between the input TI and output TI of one country to another country as trade partner. The input TI (output TI) thereby quantifies the relative importance of one country $\mathcal{C}_{1}$ as a supplier (consumer) for the production of another country $\mathcal{C}_{2}$. Note that the countries' relative economic relevance for each other is not symmetric. Furthermore, the TI is a relative measure in the sense that it is based on the fraction of a country's total trade activities that is accounted for by a specific partner. For instance, in a global setting in which all countries increase their international exports, the TI between two countries decreases if the growth in bilateral trade volume is smaller than the global average growth (given that the nation's sectoral structure remains the same). Here, we estimate TI for the ITN for each year between 1990 and 2013.

As explained above, theory suggests that BTAs foster trade activities among the partners, which should result in a stronger TI between the involved countries. To assess empirically if this is indeed the case, we analyze the BTA impact indices $\Pi^{\bullet}$ as defined in Equation (6) for each BTA. A positive value of $\Pi^{\bullet}$ implies both an increase in the level and a positive trend of the TI and thus reflects that business between the involved countries has gained in relative importance during the first years after BTA implementation. Accordingly, we consider a BTA to be effective if its BTA impact indices are positive.

The resulting probability distributions of BTA impact indices for all partners with a BTA are depicted in dark colors in Figure 2. Note that the underlying distributions of $\Pi^{out}$ and $\Pi^{\text {in }}$ are based on 214 entries each, since in general, $\Pi^{\text {out }}\left(\mathcal{C}_{1}, \mathcal{C}_{2}\right) \neq \Pi^{\text {out }}\left(\mathcal{C}_{2}, \mathcal{C}_{1}\right)$. To put these results into context, we further assess the relevance of the empirically identified impacts of the BTAs by comparing the estimated BTA impact indices with the corresponding values for those pairs of countries that have not entered a trade agreement until 2014. For the latter purpose, we calculate the BTA index for the 15,199 country pairs that have not signed such an agreement within the study period and assume an arbitrary reference year of 2002. As shown in Figure 2 , the existence of a BTA commonly coincides with an elevated probability of a positive BTA index. Note that this simple analysis does not allow directly drawing a causal link of the BTA implementation resulting in stronger entangled economic ties, since it would also be compatible with the explanation that countries with generally more p. economic development have a higher tendency toward negotiating trade agreements. Further studies on this economic development have a higher tendency toward negotiating trade agreements. Further studies on this aspect would be necessary to further address this point. In general, from the estimated probability distributions, it becomes evident that positive BTA indices are more common than negative values. These results are consistent with the general increase of international trade volumes in the course of the globalization that also affects country pairs without a dedicated trade agreement.

FIGURE 2

Figure 2. Distribution of the BTA impact indices $\Pi^{i n}$ (purple) and $\Pi^{out}$ (blue) for all 107 BTAs that have been implemented between 1995 and 2008 (dark colors, see Table 1 in Appendix for a complete list). Light colors show the corresponding results for all 15,199 pairs of countries that have not negotiated bilateral agreements assuming an arbitrary reference year of 2002 . Each of the four distributions is normalized to one and thus depicts the relative frequency. Note the logarithmic scaling of the displayed empirical frequencies.

Studying these results in more detail, we find that most countries with BTAs actually exhibit a positive average BTA impact index in both their export $\Pi^{out}$, Figure 3, top panel] and import linkages $\left(\Pi^{i n}\right.$, Figure 3 , bottom panel] to their partners. For some countries, especially the US, Australia, India and Columbia, the relative importance of the export linkages to their partners has increased more strongly than the relative importance of the import linkages from their partners. On the other hand, for other countries, such as the Philippines, Algeria, the southern African countries and Uruguay, the import linkages from their partners have gained in importance to a larger extent than their corresponding export linkages. Some notable exceptions that exhibit non-positive values of $\Pi$ for both, exports and imports include the Ukraine, Bahrain, Jordan, and Belarus. The only G2o members with non-positive values are Indonesia and China.

FIGURE 3

Figure 3. Global maps of average BTA impact indices. Shown are the country's export ($\Pi^{out}$, top) and import linkages ($\Pi^{in}$, bottom). Red values indicate that on average, the relative importances of the partners have increased for the respective countries. The average is taken over all the trade partners with which a specific country has implemented a BTA between 1995 and 2008.

In this context, it is particularly remarkable that China as one of the world's leading economies did not increase the relative importance of its agreement partners for its domestic production. When examining the composition of the average BTA impact index for China in more detail (Figure 4], the positive values of the score parameter z (see section 2) indicate that for most BTAs, the level of both input and output TI of China to its partners has increased after the date of entry into force. However, there is no continuing positive trend in the TI of China to its partners for any of these agreements (see the red shaded area in the top panels of Figure 4]. This suggests that China's agreement partners did not experience any persistent increase in importance for China's production after the BTAs have been established. In turn, considering the reciprocal TI of China's partners, the relative importance of their export and import linkages to China continuously increased during the first 5 years of the implementation period of the agreement (see bottom panels of Figure 4].

FIGURE 4

Figure 4. Trade profile for China. The TI of China to its partners (top) and of the partners to China (bottom) in the 5-year period after the date of entry into force t_f of the respective BTA. The left and right panels present the results for the export (import) linkages. The partners of China with a BTA include Chile (CHL), Hong Kong (HKG), New Zealand (NZL), Pakistan (PAK) and the Association of Southeast Asian Nations (AS). Values of the score parameter z shown in red (purple) imply a higher (lower) level of TI in the 5-year period after t_f . Trade agreements in the red (purple) shaded regions indicate a positive (negative) trend of the TI between the partners after t_f . A positive (negative) value of the BTA impact index Π is assigned to a trade agreement if it is succeeded by both a positive trend and a higher level (negative trend and lower level) of the TI.

A distinctively different picture emerges for the BTAs involving the US (Figure 5]. All 8 US partners but Jordan have become more important for US exports. While the importance of the partners' imports for the US reached higher levels after BTA implementation, only Australia, the Central American Common Market and Jordan showed an enduring positive trend in the input TI of the US. In the opposite direction, the US have not become relatively more important for their aforementioned partners. This applies to both, export and import linkages of the partners to the US (except for the import linkages of Morocco). In some cases, we even observe values of Π < 0 with both negative trends and lower levels after the agreement in the TI of the US' partners.

FIGURE 5

Figure 5. Trade profile for the US, with definitions as in Figure 4. The US have negotiated BTAs with Australia (AUS), Bahrain (BHR), Chile (CHL), the Dominican Republic (DOM), Jordan (JOR), Morocco (MAR), Singapore (SGP) and the Central American Common Market (CA) that became effective between 1995 and 2008.