The Political Economy of Preferential Trade Agreements: An Empirical Investigation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In this paper, we develop a political economy model to study the decision of representative democracies to join a preferential trading agreement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis suggests that income inequality and bilateral trade imbalances are important factors in determining the formation of PTAs, while differences in production structure among prospective member countries determine whether a CU or an FTA will emerge in equilibrium. Using a sample of 136 countries over the period 1960-2005, our empirical analysis lends strong support to these predictions: Income inequality and trade imbalances both reduce the likelihood of PTA formation, while geographical specialization increases the conditional probability of an FTA (over a CU). Terms of use: Documents in EconStor may

Dynamic formation of preferential trade agreements: The role of flexibility

“…Indeed, as part of a broader analysis investigating the empirical determinants of FTAs versus CUs that builds on their earlier work, Facchini et al. (, p. 904) verify this systematic importance of distance. Apart from distance, the steady long term decline in globally negotiated tariff bindings (which cap the MFN tariffs that countries can set) represent another prominent feature of the world trading system.…”

Intra-bloc tariffs and preferential margins in trade agreements

“…Liu (2010) investigates whether income inequality helps to explain the choice between full- ‡edged or partial-scope PTAs, but does not distinguish between FTAs and CUs either. One of the rare studies that do so is Facchini et al (2021). They study, theoretically and empirically, the factors that induce countries to form PTAs and, conditional on forming one, whether they form an FTA or a CU.…”

“…On the other hand, as Lake (2019) emphasizes, FTAs have the advantage of providing ‡exibility to its members in case they want to form FTAs with other countries, whereas in CUs all members of the bloc must agree on the establishment of additional trade agreement links. This has implications for the geographical structure of the two types of blocs, asLake and Yildiz (2016) andFacchini, Silva and Willmann (2021) point out.…”

The Effect of Islamic Revolution and War on Income Inequality in Iran

“…It uses information from the Luxembourg Income Study (LIS) and UNU-WIDER data and generates a larger dataset with more coverage across space and time. While there are some technical concerns about the imputation method in SWIID mentioned by Jenkins (2015), this Gini index has been also used in many observations such as Sturm and de Hann (2015) and Facchini et al (2021), among others. The correlation coefficient between EHII and SWIID in the case of Iran between 1970 to 1988 is 0.65 and statistically significant at 1% level.…”