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Abstract:

CEP discussion paper
Machine learning in international trade research - evaluating the impact of trade agreements
Holger Breinlich, Valentina Corradi, Nadia Rocha, Michele Ruta, J.M.C. Santos Silva and Tom Zylkin June 2021
Paper No' CEPDP1776:
Full Paper (pdf)

Tags: lasso; machine learning; preferential trade agreements; deep trade agreements

Modern trade agreements contain a large number of provisions in addition to tariff reductions, in areas as diverse as services trade, competition policy, trade-related investment measures, or public procurement. Existing research has struggled with overfitting and severe multicollinearity problems when trying to estimate the effects of these provisions on trade flows. Building on recent developments in the machine learning and variable selection literature, this paper proposes data-driven methods for selecting the most important provisions and quantifying their impact on trade flows, without the need of making ad hoc assumptions on how to aggregate individual provisions. The analysis finds that provisions related to antidumping, competition policy, technical barriers to trade, and trade facilitation are associated with enhancing the trade-increasing effect of trade agreements.