Do Provisions in Free Trade Agreements Diversify Trade?

Do free trade agreements (FTAs) lead to more diversified trade? It depends on which partner you look at and how ambitious the agreement is. This PM is a first step in understanding whether free trade agreements lead to more diversified world trade.

In this PM, the National Board of Trade has analysed 12 of the EU's free trade agreements and examined whether the agreements have contributed to a more diversified trade. We find results suggesting the EU’s free trade agreements seem to have led to a more diversified export. The results also suggest that the presence of multiple provisions in the agreements contributes to the further diversification of EU exports.

For the EU, the results suggests that the FTAs seem to have led to more diversified exports. The results also suggest that the presence of multiple provisions in the agreements contributes to the further diversification of EU exports. For developing partner countries, however, we find no evidence that FTAs have contributed to diversify their export. The FTAs have thus in this regard been most beneficial for the EU.

Export diversification makes states less economically vulnerable

Export diversification can be important for several reasons. Many developing countries have their export concentrated to a few products, which makes them economically vulnerable. There are also benefits for developed countries from more diversified exports. For example, increased export diversification can be a sign that small and medium-sized enterprises are beginning to participate in international exchange.

To facilitate trade and trade diversification, FTAs contain several provisions that the parties have agreed to implement. These include commitments to reduce regulatory burdens and measures to facilitate business access to each other's markets. Negotiating a new agreement takes several years. It is therefore important to gain a better understanding of whether these efforts have contributed to more diversified trade.