Economic Determinants of Free Trade Agreements Revisited: Distinguishing Sources of Interdependence

28 Pages Posted: 15 Jan 2014

See all articles by Scott L. Baier

Scott L. Baier

Clemson University - John E. Walker Department of Economics

Jeffrey H. Bergstrand

University of Notre Dame

Ronald Mariutto

ConAgra

Date Written: February 2014

Abstract

One of the most notable international economic events since 1990 has been the enormous increase in the number of free trade agreements (FTAs). While Baier and Bergstrand 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 Baier–Bergstrand 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.

Suggested Citation

Baier, Scott Leonard and Bergstrand, Jeffrey H. and Mariutto, Ronald, Economic Determinants of Free Trade Agreements Revisited: Distinguishing Sources of Interdependence (February 2014). Review of International Economics, Vol. 22, Issue 1, pp. 31-58, 2014, Available at SSRN: https://ssrn.com/abstract=2379176 or http://dx.doi.org/10.1111/roie.12095

Scott Leonard Baier (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-4534 (Phone)

Jeffrey H. Bergstrand

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556
United States
574-631-6761 (Phone)
574-631-5255 (Fax)

HOME PAGE: http://www3.nd.edu/~jbergstr

Ronald Mariutto

ConAgra

1 Conagra Drive
Omaha, NE 68102
United States

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