The Political Economy of Preferential Trade Agreements: An Empirical Investigation

53 Pages Posted: 21 Dec 2017

See all articles by Giovanni Facchini

Giovanni Facchini

University of Nottingham

Peri Silva

Kansas State University - Department of Economics

Gerald Willmann

Bielefeld University; IfW Kiel; KU Leuven; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: December 01, 2017

Abstract

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).

Keywords: Free Trade Areas, Customs Unions, Trade Imbalances, Income Inequality

JEL Classification: F13

Suggested Citation

Facchini, Giovanni and Silva, Peri and Willmann, Gerald, The Political Economy of Preferential Trade Agreements: An Empirical Investigation (December 01, 2017). Bielefeld Working Papers in Economics and Management No. 9-2017, Available at SSRN: https://ssrn.com/abstract=3090928 or http://dx.doi.org/10.2139/ssrn.3090928

Giovanni Facchini

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Peri Silva

Kansas State University - Department of Economics ( email )

Manhattan, KS 66502-4001
United States

Gerald Willmann (Contact Author)

Bielefeld University ( email )

Universitätsstraße 25
Bielefeld, NRW 33613
Germany

IfW Kiel ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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