Free Trade Agreement Effects in the Mediterranean Region

Abstract

Free trade agreements (FTAs) are tools that have been widely implemented for enhancing trade between countries. As a result, various models have been developed in an effort to explain the effects of these agreements on trade. The objective of this study is to develop a model suitable for exploring FTA effects on trade flows in the Mediterranean region. For that purpose a model is developed for analyzing trade flows based on the family of gravity models; the model parameters are estimated by using the seemingly unrelated regression estimation approach, in an effort to account for cross-sectional heterogeneity, serial correlation, and heteroscedasticity in the data set used. Results of the derived models are discussed and indicate that FTA effects on trade flows do exist but remain relatively low compared with other factors such as transportation costs.