Preferential Trade Liberalization and the Extensive Margin

Preferential Trade Liberalization and the Extensive Margin: An Analysis of Free Trade Agreements between the European Union and Developing Countries Jonathan Munemo* May 2010 Abstract: There has been a proliferation of free trade agreements between the European Union and developing countries in recent years This paper seeks to analyze the effect of these free trade agreements on the extensive margin of exports from developing countries We use export variety to measure the extensive margin, and address the bias resulting from time-invariant unobservables in the estimation Our empirical results show that having a free trade agreement with the European Union significantly increases the extensive margin of a developing country’s exports to the European Union We examine the extensive margin of different export products, and find robust evidence for the positive effect of a free trade agreement on the extensive margin Given the evidence from previous literature which shows that increasing exports at the extensive margin positively affects productivity, our results imply that free trade agreements with the European Union are important for many developing countries, especially the African, Caribbean, and Pacific countries that are seeking to use them as instruments of development JEL classification: F1, O1 Key words: Free trade agreements, extensive margin, export variety *Department of Economics and Finance, Salisbury University, 1101 Camden Ave., Salisbury, MD 21801, 1-410677-0057, Fax: 1-410-546-6208, E-mail: jxmunemo@salisbury.edu