Trade-diversion effects of free trade agreements (FTAs) have not been thoroughly examined empirically. Using a novel empirical approach, we confirm that FTAs divert trade away from non-member countries and even more so from internal trade (domestic sales) in member countries.

This paper studies a simple dynamic linear panel regression model with interactive fixed effects in which the variable of interest is measured with error. To estimate the dynamic coefficient, we consider the least-squares minimum distance (LS-MD) estimation method.