Trade Creation, Replacement, and Destruction in Regional Trade Agreements: Micro-level Evidence for the UK

Empirical questions surrounding the effect of regional trade agreements on international trade have typically been answered with reference to macro-level gravity equations. Prominent within this has been whether they create or divert trade. In this paper, motivated by the recent development of theories of export-platform FDI, we use micro-level data to explore the part of trade diversion that follows from FDI. Using information on acquisition FDI in the UK manufacturing sector between 1988 and 1998 we find evidence of trade creation, replacement, and destruction from FDI external and internal to the EU.