Third-country effects on the formation of free trade agreements

Abstract

The recent proliferation of free trade agreements (FTAs) has resulted in an increasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the participating countries' economic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also crucially dependent on the participating countries' existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a signi…cant fraction of FTA formations that would not otherwise be predicted by countries'economic characteristics.

The International Trade Network in Space and Time

“…See Baltagi et al (2007) for an application to foreign direct investments, and Egger and Larch (2008) and Chen and Joshi (2010) for an application to regional trade agreements. In a different perspective, some authors have looked at the role of "third countries" in the transmission of shocks, see Abeysinghe and Forbes (2005) and Dees and Saint-Guilhem (2011). uncover the properties of the web of trade flows by focusing precisely on the structural, multilateral side of international trade relations (Fagiolo et al, 2009;De Benedictis and Tajoli, 2011).…”

The Political Economy of Preferential Trade Agreements: An Empirical Investigation

“…By eliminating intra-bloc barriers, the creation of an FTA lowers the incentives of import competing firms to lobby for higher external tariffs, inducing a reduction in the rents from lobbying (tariff complementarity). 7 This reduces the political viability of welfare decreasing FTAs, contrary to the earlier findings by Grossman and Help- 5 Other important papers in this literature are Chen and Joshi (2010) and Bergstrand and Egger (2013). In particular, Chen and Joshi allow for the possibility of hub-and-spoke patterns to emerge, whereas Bergstrand and Egger consider instead the determinants of the joint formation of PTAs and bilateral investment agreements (BITs).…”

“…The assumptions on the supply and demand sides of the model ensure that markets are segmented. 11 The corresponding indirect utility is given by:…”

The Openness of National Economies: The World and Russia

“…Exporters in nonmember countries push their governments to join existing PTAs or create new ones to counteract the potential damage caused by preferential trade liberalization (Baldwin and Jaimovich, 2010). There is a set of studies which find broad empirical support for Baldwin's domino theory -formation of PTAs creates an incentive for outsiders to become members of an existing PTA or to form new PTAs (Egger and Larch, 2008;Baldwin and Jaimovich, 2010;Chen and Joshi, 2010). According to Egger and Larch (2008), these results are particularly useful to "predict" the process of regional integration in Europe.…”