The Effect of A Country’s Size on the Extensive Margin of Trade in the Economic Partnership Agreement (Epa)

This study employed the Casella (1996) model and its extension Badinger and Breuss (2006) to examine the relationship between the size of a country and the effects of trade bloc enlargement on the extensive margin of trade. Therefore, export of large and small European countries to African, Caribbean, and Pacific (ACP) countries on the extensive margin were investigated to validate the effect of introducing an economic partnership agreement from 2004 to 2014. The empirical results from the fixed and random effect panel regression on HS 6 digit disaggregated data provided the evidence on the minor benefits of the small country over a large country. Hence, the interpretation of the results was in line with Casella’s (1996) hypothesis, which emphasized the importance of reducing domestic market differences between large and small countries by improving their market access. Our findings imply that the market access initiative will eventually play a vital role in helping the small countries. This in turn encourages firms in small countries to increase the quantity and diversity of the goods they produce. These findings urge the policymakers to pay more attention to the size of the country in improving the formulation of trade agreements in line with their benefits for different groups of countries.