Do Trade Creation and Trade Diversion Effects Differ Due to the Income Levels of Countries in the Era of Globalization?

Abstract

This chapter applies the gravity model approach to examine the trade creation and trade diversion effects in terms of total trade, export, and import for 86 countries over 1994-2018. To evaluate the possible difference between countries, the analyzing sample is divided into three groups: high income, upper middle, and lower middle income countries. Therefore, specific for each income level group, trade creation and trade diversion effects are estimated by Poisson pseudo maximum likelihood estimator. Moreover, along with this, the trade potential for each group and even for each country is calculated based on the estimated results. The results indicate that even in average, the country groups look like they reached their trade potential. The country-based analysis reveals that there is vital potential to expand trade relations. In this context, the findings point out the possibility of increasing income level by developing trade potential, especially in continuously rising globalization.