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.

I propose a simple solution to the distance puzzle in international trade. Contrary to existing estimates of persistent or increasing distance effects on trade, I offer robust evidence that the impact of distance on trade has fallen steadily over time.