The impact of free trade agreements on commodity trade flows

This study analyzes the impact of Free Trade Agreements (FTAs) on the international palm oil trade for two primary exporters of palm oil: Indonesia and Malaysia. The study used 21 annual observations for 77 export destinations which contain 19 percent zero observations. The gravity model with Ordinary Least Squares (OLS) Fixed Effect (FE) and Poisson Pseudo Maximum Likelihood (PPML) regressions are utilized to quantify the changes of palm oil trade flows. The differentiation of palm oil into crude and refined is used for a deeper analysis of the impact of FTAs. As a result, the PPML estimation provides more satisfactory results than the OLS FE model due to the treatment of zero values data. The impact of FTAs is shown by the regression results of the different types of palm oil: crude (HS 151110) and refined (HS 151190). In addition, the estimation output shows that the FTAs have a larger impact on the Malaysian palm oil trade than the Indonesian palm oil trade.

Key words: Free Trade Agreements, Poisson Pseudo Maximum Likelihood, Palm Oil, Gravity model