The implications of re-exports for gravity equation estimation, NAFTA and Brexit

Abstract

This paper illustrates the importance of taking into account re-exports. It shows that not taking into account re-exports causes estimates from the gravity model to be biased. It also considers the implications of re-exports for two current policy events. It is shown that the United States actually ran a net trade surplus in the North American Free Trade Agreement (NAFTA). Second, it is argued there may be additional costs for the UK economy from Brexit that are not addressed in earlier studies. This paper derives bilateral trade flows corrected for re-exports for a large number of countries at a detailed product level, using the World Input–Output Database (WIOD). Through a constrained non-linear optimization procedure, complete origin–destination matrices of re-exports are determined. Trade is subsequently restored to its most likely origin and destination.