Towards input-output-based measurements of trade creation and trade diversion

This paper discusses a new approach to quantify trade creation and trade diversion that relies on the structural decomposition analysis in an inter-country input-output framework. The proposed measure captures the contribution of trade creation (diversion) between two countries to the GDP growth of the home country, partner country and third countries. For a trial calculation, the author uses the 2016 release of the OECD inter-country input-output tables and focuses on the period 2000-11. Creation, diversion, but also contraction of trade flows are shown to be intrinsic to any pair of countries that may or may not be linked by a trade agreement. There is no evidence that the rise of free trade agreements in 2000s is associated with higher magnitude of these trade effects for an average country pair. The proposed approach is thought to be a useful alternative to econometric estimates of trade creation and trade diversion available to date.