Spatial spillover effects of third countries' free trade agreements on trade

This study is to analyze whether or not the spatial spillover effects of third countries’ free trade agreements (FTAs) on the trade with 130 countries during 2002~2014, and if so, how the 3^rd countries’ FTAs affect the trade. The gravity model is expanded to measure the spillover effects of the 3^rd countries’ FTAs on the trade by additionally including a weighted 3^rd countries’ FTA spatial matrix with an independent variable in the model. The 3^rd countries’ FTAs is expected to play the role of a substitute or complement for trade by expanding or reducing trade. Thus, this study expands the gravity model with weighted a 3^rd countries’ FTA spatial matrix. The spatial gravity model is effective for removing endogeneity and measuring external shocks by including independent variables such as fixed effects, 3^rd country’s geographical spatial effects, weighted FTA spatial matrix, endogenous independent variables, spatial lag and spatial interdependent matrix. Dependent variables used are the amount of trade, export and import, which gives more detail of the spatial effects of 3^rd countries’ FTA by trade type. The study includes FDI and a regional dummy to expand on the role of the FDI and regional characteristics in the FTA spatial effect. This study also identifies the determinants of trade in the spatial gravity model and will give some implications for the 3^rd country effects of the FTA on trades or the spatial spillover effect of 3^rd countries’ FTA on the trade. It will measure how the 3^rd countries’ FTA will affect trade if there are spatial spillover effects from the 3^rdcountries’ FTA.

Keywords: Spatial effect, 3^rd countries’ FTA, spatial model, weighted FTA spatial matrix, trade