IDEAS home Printed from https://ideas.repec.org/a/bla/ecinqu/v62y2024i2p748-781.html
   My bibliography  Save this article

Dynamic preferential trade agreement formation and the role of political economy

Author

Listed:
  • Eric Conglin Chi
  • Halis Murat Yildiz

Abstract

Using a dynamic preferential trade agreement (PTA) formation model, we show that political biases in exporting and import‐competing sectors substantially impact the extent of PTA formation. While both exclusion and free riding incentives constrain the expansion to global free trade in a free trade agreement (FTA) game, only the former incentive arises in a customs union (CU) game. When we endogenize the choice between FTAs and CUs, the tension between the flexibility benefit of FTAs and the coordination benefit of CUs reveals that FTAs always serve as PTA building blocks while CUs may serve as PTA building or stumbling blocks.

Suggested Citation

  • Eric Conglin Chi & Halis Murat Yildiz, 2024. "Dynamic preferential trade agreement formation and the role of political economy," Economic Inquiry, Western Economic Association International, vol. 62(2), pages 748-781, April.
    • Handle: RePEc:bla:ecinqu:v:62:y:2024:i:2:p:748-781
    DOI: 10.1111/ecin.13199
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecin.13199
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecin.13199?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Calvo-Pardo, Hector & Freund, Caroline & Ornelas, Emanuel, 2009. "The ASEAN free trade agreement : impact on trade flows and external trade barriers," Policy Research Working Paper Series 4960, The World Bank.
    2. Antoni Estevadeordal & Caroline Freund & Emanuel Ornelas, 2008. "Does Regionalism Affect Trade Liberalization Toward Nonmembers?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1531-1575.
    3. Nuno Limão, 2018. "Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the United States," World Scientific Book Chapters, in: Policy Externalities and International Trade Agreements, chapter 13, pages 353-371, World Scientific Publishing Co. Pte. Ltd..
    4. Grossman, Gene M & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 675-708, August.
    5. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    6. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February.
    7. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    8. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 8, pages 168-185, World Scientific Publishing Co. Pte. Ltd..
    9. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
    10. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    11. Eric W. Bond & Raymond G. Riezman & Constantinos Syropoulos, 2013. "A strategic and welfare theoretic analysis of free trade areas," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 8, pages 101-127, World Scientific Publishing Co. Pte. Ltd..
    12. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October.
    13. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
    14. Pravin Krishna, 1998. "Regionalism and Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 227-251.
    15. Facchini, Giovanni & Silva, Peri & Willmann, Gerald, 2013. "The customs union issue: Why do we observe so few of them?," Journal of International Economics, Elsevier, vol. 90(1), pages 136-147.
    16. Giovanni Facchini & Peri Silva & Gerald Willmann, 2021. "The Political Economy of Preferential Trade Agreements: An Empirical Investigation [Distributive politics and economic growth]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3207-3240.
    17. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
    18. Richard Baldwin & Frédéric Robert-Nicoud, 2015. "A simple model of the juggernaut effect of trade liberalisation," International Economics, CEPII research center, issue 143, pages 70-79.
    19. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
    20. Sanjeev Goyal & Sumit Joshi, 2006. "Bilateralism And Free Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 749-778, August.
    21. Kamal Saggi & Andrey Stoyanov & Halis Murat Yildiz, 2018. "Do Free Trade Agreements Affect Tariffs of Nonmember Countries? A Theoretical and Empirical Investigation," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 11, pages 238-280, World Scientific Publishing Co. Pte. Ltd..
    22. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    23. Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2018. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 10, pages 223-237, World Scientific Publishing Co. Pte. Ltd..
    24. Kyle Bagwell & Robert W. Staiger, 2011. "What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization," American Economic Review, American Economic Association, vol. 101(4), pages 1238-1273, June.
    25. Bohara, Alok K. & Gawande, Kishore & Sanguinetti, Pablo, 2004. "Trade diversion and declining tariffs: evidence from Mercosur," Journal of International Economics, Elsevier, vol. 64(1), pages 65-88, October.
    26. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-519, September.
    27. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateralism, multilateralism, and the quest for global free trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 7, pages 156-167, World Scientific Publishing Co. Pte. Ltd..
    28. Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2018. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 9, pages 186-222, World Scientific Publishing Co. Pte. Ltd..
    29. Kamal Saggi & Halis Murat Yildiz, 2009. "Optimal tariffs of preferential trade agreements and the tariff complementarity effect," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 2(1), pages 5-17, April.
    30. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
    31. Lake, James & Roy, Santanu, 2017. "Are global trade negotiations behind a fragmented world of “gated globalization”?," Journal of International Economics, Elsevier, vol. 108(C), pages 117-136.
    32. Aghion, Philippe & Antras, Pol & Helpman, Elhanan, 2007. "Negotiating free trade," Journal of International Economics, Elsevier, vol. 73(1), pages 1-30, September.
    33. Moïse Nken & Halis Murat Yildiz, 2022. "Implications of multilateral tariff bindings on the extent of preferential trade agreement formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 301-347, February.
    34. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    35. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2019. "Should the WTO require free trade agreements to eliminate internal tariffs?," Journal of International Economics, Elsevier, vol. 118(C), pages 316-330.
    36. Raymond Riezman, 1999. "Can Bilateral Trade Agreements Help Induce Free Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 751-766, May.
    37. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
    38. Lake, James & Nken, Moïse & Yildiz, Halis Murat, 2020. "Tariff bindings and the dynamic formation of Preferential Trade Agreements," Journal of International Economics, Elsevier, vol. 122(C).
    39. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
    40. John McLaren, 2002. "A Theory of Insidious Regionalism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 571-608.
    41. Mrázová, Monika & Vines, David & Zissimos, Ben, 2013. "Is the GATT/WTO's Article XXIV bad?," Journal of International Economics, Elsevier, vol. 89(1), pages 216-232.
    42. James Lake, 2019. "Dynamic formation of preferential trade agreements: The role of flexibility," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 132-177, February.
    43. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 317-390, Elsevier.
    44. Ornelas, Emanuel, 2008. "Feasible multilateralism and the effects of regionalism," Journal of International Economics, Elsevier, vol. 74(1), pages 202-224, January.
    45. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(4), pages 1475-1506.
    46. Levy, Philip I., 1999. "Lobbying and international cooperation in tariff setting," Journal of International Economics, Elsevier, vol. 47(2), pages 345-370, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 317-390, Elsevier.
    2. Lake, James & Nken, Moïse & Yildiz, Halis Murat, 2020. "Tariff bindings and the dynamic formation of Preferential Trade Agreements," Journal of International Economics, Elsevier, vol. 122(C).
    3. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    4. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    5. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2019. "Should the WTO require free trade agreements to eliminate internal tariffs?," Journal of International Economics, Elsevier, vol. 118(C), pages 316-330.
    6. Nken, Moïse & Yildiz, Halis Murat, 2017. "Implications of multilateral tariff bindings on the formation of preferential trade agreements and quest for global free trade," MPRA Paper 83209, University Library of Munich, Germany.
    7. Moïse Nken & Halis Murat Yildiz, 2022. "Implications of multilateral tariff bindings on the extent of preferential trade agreement formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 301-347, February.
    8. Eric Conglin Chi & Halis Murat Yildiz, 2024. "Bilateralism vs. multilateralism: Role of political economy for the prospect of multilateral free trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(3), pages 870-900, August.
    9. Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2022. "The role of non‐discrimination in a world of discriminatory preferential trade agreements," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 174-212, February.
    10. Staiger, Robert & Bagwell, Kyle & Bown, Chad, 2015. "Is the WTO Passé?," CEPR Discussion Papers 10672, C.E.P.R. Discussion Papers.
    11. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    12. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    13. James Lake, 2017. "Free Trade Agreements As Dynamic Farsighted Networks," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 31-50, January.
    14. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," MPRA Paper 76330, University Library of Munich, Germany.
    15. James Lake, 2019. "Dynamic formation of preferential trade agreements: The role of flexibility," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 132-177, February.
    16. Harold D Chiang & Yukun Ma & Joel Rodrigue & Yuya Sasaki, 2021. "Dyadic double/debiased machine learning for analyzing determinants of free trade agreements," Papers 2110.04365, arXiv.org, revised Dec 2022.
    17. Lake, James & Roy, Santanu, 2017. "Are global trade negotiations behind a fragmented world of “gated globalization”?," Journal of International Economics, Elsevier, vol. 108(C), pages 117-136.
    18. Hinnerk Gnutzmann & Arevik Gnutzmann‐Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 178-224, February.
    19. Ornelas, Emanuel, 2012. "Preferential trade agreements and the labor market," LSE Research Online Documents on Economics 121752, London School of Economics and Political Science, LSE Library.
    20. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecinqu:v:62:y:2024:i:2:p:748-781. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/weaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.