Premium
Economic Determinants of Free Trade Agreements Revisited: Distinguishing Sources of Interdependence
Author(s) -
Baier Scott L.,
Bergstrand Jeffrey H.,
Mariutto Ronald
Publication year - 2014
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12095
Subject(s) - economics , context (archaeology) , welfare , free trade , economic interdependence , international economics , liberalization , free trade agreement , logit , international trade , domino effect , econometrics , china , geography , physics , archaeology , nuclear physics , market economy
One of the most notable international economic events since 1990 has been the enormous increase in the number of free trade agreements ( FTAs ). While B aier and B ergstrand were the first to show empirically the impact of a country‐pair's economic characteristics on the likelihood of the pair having an FTA , the literature has been extended to demonstrate the importance empirically of FTA “interdependence”—the effect of other FTAs on the probability of a pair having an FTA . In the context of the B aier– B ergstrand framework, this paper delves deeper into the sources of interdependence—an “own‐ FTA ” effect and a “cross‐ FTA ” effect. The authors argue that the own‐ FTA effect (the impact on the net welfare gains of an FTA between two countries owing to either already having other FTAs ) likely dwarfs the cross‐ FTA effect (the impact on the net welfare gains of an FTA between the pair owing to other FTAs existing in the rest of the world, or ROW ). Augmenting a parsimonious logit model with simple “multilateral FTA ” and “ ROW FTA ” terms to differentiate the own and cross effects empirically, it is shown that the marginal impact on the probability of a country‐pair having an agreement of either country having one more FTA with a third country is 50 times that of one more FTA between another pair in ROW . The results suggest that “domino (own‐ FTA ) effects” have far exceeded “competitive liberalization (cross‐ FTA ) effects” in the proliferation of FTAs .