The Effects of Trade Creation and Trade Diversion under the Free Trade Agreement between Peru and the United States: A Gravitational Analysis

This paper is oriented to study the effects of trade creation and trade diversion produced by the Free Trade Agreement (FTA) between Peru and the United States, using 10-digit disaggregated commodity data between 1995 and 2015. For that purpose, this paper takes Carrere (2006), MacPhee and Sattayanuwat (2014), and Yang and Martinez (2013) methodologies that use three dummy variables in order to quantify these effects. The estimation method used is called Pseudo-Poisson Maximum Likelihood (PPML), introduced by Santos Silva and Tenreyro (2006). In addition, differentiations between types of goods and staging categories are made. The main results show that the FTA generates the largest effect in intra-bloc trade creation and import trade creation for consumption goods. While for the staging category A, also called immediate access, the analysis shows that it generated the largest effect of import trade diversion, and the staging category C (10-year tariff reduction) produced the largest effect of extra-bloc trade creation (throughout the export increase from countries within the bloc to the rest of the world).