The Trade Effects of MERCOSUR and The Andean Community on U.S. Cotton Exports to CBI countries

result, the Verdoorn method has been more frequently used to compute trade diversion
(Koo and Mattson, 2001). This study uses the Verdoorn method to calculate trade
diversion effects.

(Koo and Mattson, 2001), computed trade expansion, which is the sum of trade
creation and trade diversion effects using the demand elasticity with respect to tariffs (λ):
TE = TC + TD= M λ (∆t / t)                                           (6)

Where TE is the total increase in trade resulting from elimination of tariff under the non-
reciprocal trade arrangement.

Since the import demand elasticity with respect to import tariffs can be calculated
form import demand models, TE is calculated using equation 6. The TC effect can be
calculated by combining equations 5 and 6 as follows (Koo and Mattson, 2001):

TC = TE / [1 - (Mn / Mt)].                                                     (7)

V — Results and Discussion

This section discusses the descriptive statistics (table 1) and the estimation results
for the one-way fixed effect panel estimator (table 2). According to the F-statistics test
we cannot ignore the cyclic and cross-sectional effects as the F-statistics for the one way
FEM is significant at (P < 0.0001). Thus, the probability that there are no effects in the
model is zero. The R² for the import demand model is 0.82, indicating that the model is a
good fit. Table 2 presents

The own price elasticity of CBI cotton import demand is very inelastic (-0.545),
indicating that CBI cotton imports from the U.S. are not sensitive to price changes; i.e. a
one percent increase in the imported price of cotton would reduce CBI imports by 0.545
percent.

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