- **<u>Table 1: Variable definitions</u> Dependent variables:** • <u>Stage 1:</u> pr( _sector_ )exp: binary; indicates whether there were positive export flows between a country-pair for a given year in a given sector

- • <u>Stage 2:</u> ln( _sector_ )exp: log of export flows between a country-pair for a given year in a given sector

- **Explanatory variables:** • lngdprep: log exporter GDP in constant (2000) US$ • lngdppcrep: log exporter GDP per capita in constant (2000) US$ • lngdppar: log importer GDP in constant (2000) US$ • lngdppcpar: log exporter GDP per capita in constant (2000) US$ • lndistwces: log of distance between countries weighted by the geographic distribution of population

- • contig: 0-1 dummy that indicates whether countries share a common border • comlang_off: 0-1 dummy that indicates whether countries share a common official language • colony: indicates whether countries have had a colonial link at some point in their history • lleither: 0-1 dummy that indicates whether either of the countries is landlocked • isleither: 0-1 dummy that indicates whether either of the countries is an island • wto: 0-1 dummy that indicates whether both countries are members of the GATT/WTO at a given point in time

- • fta: 0-1 dummy that indicates whether both countries are members of the same FTA at a given point in time

- • mra( _sector_ ): 0-1 dummy that indicates whether both countries have an MRA with each other at a given point in time

- • hr( _sector_ ): 0-1 dummy that indicates whether both countries have harmonised standards at a given point in time

- • hr( _sector_ )oecd_sgp: 0-1 dummy that takes the value 1 if the exporter is an OECD country (or Singapore) that is not part of a harmonising region, while the importer is part of such a region

- • hr( _sector_ )_dev: 0-1 dummy that takes the value 1 if the exporter is a non-OECD country that is not part of a harmonising region, while the importer is part of such a region

- • ai and aj are importer and exporter fixed effects respectively as used in HMR 2004. In the course of the analysis the validity of using country-pair direction-specific fixed effects, aij will also be investigated

- • <u>at is a time trend, capturing unspecified effects of the phenomenon of “globalization”</u>

As for the coefficients on the variables of interest, it is hypothesised that having an MRA or being part of a harmonising region will increase the probability of two countries trading with each other. If there were high volumes of trade between two partners already before liberalization, the export-probability might not increase any further, so the coefficient could also turn out to be zero. In the case of harmonization, we also need to make predictions about the effects on excluded countries. For them, the effect is expected to be more ambiguous. Two forces will be working in opposite directions: while a common standard will give firms in partner-countries a costadvantage, thereby possibly acting trade-reducing for third countries, it might be the newly integrated market that makes it worthwhile for third countries to export to the region in the first place. It is expected that the market integration effect will prevail over the cost-disadvantage effect for third countries with competitive export sectors in the industries under consideration. The effect for less competitive third countries (in this study the non-OECD countries) is expected to be less positive than that for the more competitive ones, yet a prediction about the sign of the coefficient seems difficult. Regarding the second stage of the estimation, it is expected that MRAs contribute to a firm’s variable cost and should therefore turn out to be significant. Since harmonization, on the other hand, is hypothesized to remove mainly fixed costs, those liberalization dummies should turn out to be insignificant in the second stage.

21