Free Trade Agreements with the EU and the Extensive Margin of Developing Country Exports

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 estimate the effect of a free trade agreement on the extensive margin and address the bias resulting from time-invariant unobservables.  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 get robust results. Given the evidence from previous literature which shows that export variety 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