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

Abstract

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.