Differential Effectiveness of Regional Trade Agreements, 1958-2012: The Conditioning Effects from Homophily and World-System Status

ABSTRACT

Borrowing insights from economic sociology and world system theory, this study highlights the dual “embeddedness” of regional trade agreements (RTAs) and examines the contingent nature of their trade-promoting effect. While overall RTAs are found to promote bilateral trade, the trade-promoting effect varies. First, RTAs are embedded in dyadic homophily. Geographic, political, and cultural proximity provides a favorable institutional environment for the materialization of the trade-expanding potential unleashed by RTAs. Most RTAs are predominantly focused on reducing trade barriers and are far less effective in creating effective institutions (especially informal institutions), thereby rendering the actual effectiveness of RTAs dependent on dyadic homophily. Second, RTAs are also embedded in the overall world system. RTAs between wealthy core countries boost trade more effectively than those between less developed peripheral countries. Peripheral countries have limited economic power and lack the capacity or intention to fully implement policies stipulated in RTAs. Overall, the dual “embeddedness” and its resulting differential effectiveness of RTAs is expected to intensify regionalism and the North-South divide in global trade.

KEYWORDS:

• Economic sociology
• global and transnational sociology
• political economy of the world-system
• international trade

Notes

1. The notions of negative integration and positive integration actually have a long history and can be traced back to Tinbergen (1954).

2. Available at https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85.

3. Available at http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx. There are five types of RTAs, including free trade agreements (FTAs), customs unions (CUs), economic integration agreements (EIAs), “partial scope” agreements (PSAs, that is, agreements covering only certain products), and preferential trade agreements (PTAs). The majority of RTAs are FTAs and CUs. In this analysis I do not distinguish these forms. It is often difficult to distinguish them in practice (Moser and Rose 2011). It can be misleading to categorize RTAs simply by their name. It requires that we look into their text (and even better, their actual implementation) to code their types. I hope to further code RTA types, expand my data, and explore potentially varying effects of different RTA types in future research.

4. Available at http://www.systemicpeace.org/inscrdata.html.

5. One potential concern about using GDP per capita as a proxy for world-system status is whether China’s (probably also India’s) world-system status is adequately captured by its GDP per capita. Actually the status of China has always been debated in the world system literature. It has been classified as a peripheral (Babones 2005), semi-peripheral (Chase-Dunn, Kawano, and Brewer 2000; Wallerstein 1979), or core country (Van Rossem 1996) by different scholars. To test the robustness of our findings, I also tried running all analyses with China (or both China and India) excluded. The results are substantively the same.

6. I thank Jason Beckfield for providing further explanations and advice on using this measure.

7. Available at http://data.worldbank.org/data-catalog/world-development-indicators.

8. I add 1 to bilateral trade before the logarithmic transformation, as the logarithm of 0 is undefined.

9. There is a wealth of empirical research in international economics that has generated mixed evidence with respect to the precise magnitude of RTAs’ trade-promoting effect. According to the various estimates in the literature, the overall effect of RTAs can range from as large as 200% (Baier and Bergstrand 2007), 34% (Baier, Yotov and Zylkinc 2019), to mostly none (Kohl 2014). The estimated effect is often sensitive to the data (e.g., what RTAs, what and how many countries, and how many years are included) and the modeling technique used. A notable tendency in the more recent literature is that the overall effect of RTAs may be more moderate than what was expected.

Additional information

Notes on contributors

Min Zhou

Min Zhou is an Associate Professor of Sociology at the University of Victoria. He received his PhD from Harvard University. His research interests are centered on various processes and consequences of global social change. He has published articles on global economic networks, international organizations, global public opinions, and transnational social movements. His recent SSHRC-funded research investigates the role of social networks in political activities, labor markets, internal migration, and health in China.