Working Paper: CEPR ID: DP16098
Authors: Giovanni Facchini; Peri A. Silva; Gerald Willmann
Abstract: 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 shows that bilateraltrade imbalances and income inequality are important factors determining the formation of PTAs, whereas the patterns of geographic specialisation explain whether a CU or an FTA will emerge. Our empirical analysis - using a comprehensive panel dataset spanning 187 countries over the period 1960-2015 - provides strong support for these predictions.
Keywords: Free Trade Areas; Customs Unions; Trade Imbalances; Income Inequality
JEL Codes: F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bilateral trade imbalances (F14) | PTA formation (P30) |
| income inequality (D31) | PTA formation (P30) |
| geographic specialization (R12) | choice between FTA and CU (F15) |