Effects of the EU-Mexico Free Trade Agreement

The Free Trade Agreement between Mexico and the 15 member countries of the European Union officially entered into force on July 1, 2000. In this empirical study we first use a gravity model for import and export flows to quantify the trade effects of the EU-Mexico FTA. Besides the fixed effects approach we apply the instrumental variables estimator developed by Hausman and Taylor (1981). This method - unlike random effects - does not require independence of unobserved and observed characteristics, and allows us to study variables that are fixed over time. Our results indicate that the EU-Mexico FTA had a positive trade creation effect for imports. Moreover there is no evidence for trade diversion; the FTA generated a positive effect on imports with non-members. Also, other triangular FTAs - a country with which both the US and the EU have signed a FTA - tend to have a negative impact on both imports and exports of the EU and Mexico. We also estimate the effects of the EU-Mexico FTA using a complementary methodology, namely a standard CGE (Computable General Equilibrium) Model, reaching somewhat similar conclusions, albeit here signs of trade diversion are observed for some trade partners, while global welfare does increase.