Analyzing the Determinants of Trade Agreements: A Cross Country Socio-Economic-Political Analysis

ABSTRACT

This article examines the determinants of trade agreements. Apart from the standard economic variables like market size, factor endowment difference, and distance, we incorporate socio-cultural and political factors like common language, colonial heritage, political regime, and bilateral relationships. We perform a qualitative comparative analysis, which gives joint causation. The panel probit regression for 163 countries during 2000 to 2014 reveals that countries joined trade agreements not merely for economic reasons but for political and socio-cultural reasons. Only colonial heritage acts as an opposing force. Detailed knowledge of the determinants of trade agreements can help to form successful bilateral trade relations.

KEYWORDS:

• Economic Integration
• Regionalism
• panel probit
• QCA
• socio-cultural factors
• political factors

Acknowledgments

We thank two anonymous reviewers for their valued comments and suggestions. We also thank Pulak Mishra and other participants at the Masters’ Thesis Presentation, 2018 of the Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur, India, for their suggestions on methodological issues where an initial draft of the study was presented. However, the authors are responsible for errors, if any.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ RTAs in the World Trade Organization (WTOs) are taken to mean “any reciprocal trade agreement between two or more partners, not necessarily belonging to the same region.” A growing number of cross-continent RTAs implies that these trade agreements need not be confined to neighboring countries in a region.

² All the countries who were WTO member in 2014.

³ Note that though we define our dependent variable as RTA, RTAs are not necessarily confined to a region as we mentioned in the Introduction following the WTO definition.

⁴ Note that one limitation of the population weighted distance measure is that the presence of physical barriers like mountain ranges or oceans cannot be taken into account.

⁵ We also carry out the analysis for the small-country sample in which at least one of the countries is small in terms of world trade.

⁶ We do not consider the EU in our sample as it is not a country. Thus, the number of countries in the WTO sample are 163.

⁷ The appendix can be found online at www.tandfonline.com/uitj.

⁸ Rubenzer (2008) conducts a QCA based approach to determine how ethnic groups impact US foreign policy.

⁹ The summary statistics are reported in Tables A2, A3, and A4.

¹⁰ We also examined whether an investment arrangement can lead to trade agreements. However, the estimation results could not provide support in favor of bilateral investment, leading to countries forming a trade agreement. Kubny, Lundsgaarde, and Patel (2008) cite the cases of regional heavyweights Brazil, China, India, and South Africa, arguing that they have played a minor role in promoting regional integration through outward FDI. According to them, it is often impossible to isolate the FDI effects of regional integration because regional integration often goes hand in hand with unilateral liberalization; that may itself be the ultimate reason for a country’s improved attractiveness to FDI (Kubny, Lundsgaarde, and Patel 2008, 23).