Does regional trade integration reinforce or weaken capital mobility? New evidence from four free trade areas

Abstract

The study aims to empirically determine whether a higher level of trade openness and the presence of better legal protection for investors enhances the impact of trade bloc membership on capital mobility based on four trading blocs: Eurasian Economic Union (EAEU), Central American and Dominican Republic Free Trade Agreement (CAFTA-DR), Central European Free Trade Agreement (CEFTA), and the Pacific Alliance. This study employs the fully modified and dynamic ordinary least squares estimators and a panel quantile regression cointegration estimator. The study finds that a country's affiliation with a trade bloc improves capital mobility in the whole group and EAEU region, low capital mobility in the Pacific Alliance region and moderate low capital mobility in the CAFTA-DR region. The legal protection system alone provided for the investors does not improve the level of capital mobility unless its interaction with investment is included. Also the study reveals that high trade openness does not necessarily lead to better capital mobility for the studied trade blocs.