On the Political Economy of Trade Agreements: A De Jure and De Facto Analysis of Institutions

This paper examines the effect of the quality of institutions on the membership in trade agreements from de jure and de facto perspectives, with a special focus on the Middle East North Africa (MENA) countries. First, for the de jure aspect, we analyze how the quality of domestic institutions in a country affects its likelihood of joining a trade agreement. Moreover, for the de facto aspect, this paper examines how the difference in quality of institutions among trading partners and enforceability degree affects the volume of trade among them. Our main findings show that the larger the difference in the quality of political institutions between a country and its trading partners, the less likely it signs a deeper trade agreement (compared to more shallow ones). Moreover, the higher the enforcement degree of the agreement, the greater the positive effect on trade flows. This result holds for the enforcement of the aspects related to the World Trade Organization provisions, and those not related to it. Yet, the larger the institutional difference among trading partners, the lower the negative effect on trade flows in deep agreements compared to shallow ones. It is also worth noting that our results hold even when we control for the selection bias related to joining a trade agreement.