Proceedings of the German Development Economics Conference, Berlin 2011 58
International trade ows reveal strong persistence over time. This paper is concerned with the role of trade agreements in this persistent environment. The data reveal a high level of heterogeneity of the trade- creating effect along the trade volume and per-capita income distributions. If controlled for persistence in bilateral trade ows, I find that higher per- capita incomes are associated with smaller increases in bilateral trade ows if an agreement is present, compared to lower-income countries. This gives rise to a re-assessment of trade agreements and hence of economic policy. While they are a powerful tool for trading partners at the lower end of the per-capita income distribution, they are less so at the upper end.