The Role of Free Trade Agreements in Reducing Trade Costs：A Panel Data Analysis

Abstract

Since the second half of the 19th century, three waves of globalization have accelerated the process of trade liberalization, leading to a significant reduction in global trade costs. Meanwhile, the number of Free Trade Agreements (FTAs) signed worldwide has increased rapidly, and the proportion of "WTO-X" provisions in newly signed agreements has continued to rise. The correlation between these two phenomena has attracted widespread attention. This paper aims to explore the role of free trade agreements in reducing trade costs. It measures trade costs based on the gravity model framework and constructs a panel data model for analysis. The model takes bilateral trade costs (including total trade costs, agricultural trade costs, and manufacturing trade costs) as the explained variables, with the actual number of FTAs and core depth as the core explanatory variables, while incorporating relevant control variables. The research results show that the actual number and core depth of FTAs have a significant negative impact on total trade costs and manufacturing trade costs, but a significant positive impact on agricultural trade costs. Regarding control variables, the difference in per capita GDP and geographical distance are positively correlated with trade costs, while common currency and WTO membership are negatively correlated with trade costs. Endogeneity and robustness tests verify the reliability of the above results. This study provides a reference for countries to formulate trade policies and promote the development of free trade agreements to reduce trade costs.