Regional Cooperation and Bilateral Trade Flows: An Empirical Measurement of Resistance

Drawing on the procedures developed for estimating stochastic frontier production functions, the methodology suggested in this paper to work out the impact of country-specific resistance to bilateral trade flows between two countries is the estimation of a stochastic frontier gravity type model. The workability of the suggested method is demonstrated using trade data from the recently formed Indian Ocean Rim - Association for Regional Cooperation (IOR-ARC) countries. The role of the regional cooperation towards reducing trade restrictiveness among its member countries is examined by considering Australia's exports to other member countries of IOR-ARC. The empirical analysis indicates that on average, Australia has been able to achieve more (about 15%) of its potential exports with IOR-ARC countries due to regional cooperation.