Formation Of Free Trade Agreements Research Articles

The diverse effects of non‐tariff measures on free trade agreements: Global empirical evidence from binary response models

AbstractWe examine how non‐tariff measures (NTMs) affect the formation of free trade agreements (FTAs), using data from 114 countries over the period 1986–2019 and applying binary response models. Splitting NTMs into eight categories, some tend to be restrictive, some promotive and some neutral, in terms of their effects on FTA formation. Technical measures tend to encourage, while non‐technical measures tend to discourage, country‐pairs to join FTAs. Aggregating all NTMs into one variable would give rise to weak conclusions. Our results for the 12 control variables are largely in line with those of previous studies on international trade flows or on FTAs but without considering NTMs.

Political economy of free trade agreements in China, Japan, and South Korea: sectoral politics of the FTA wave, 1998–2016

AbstractThe aim of this study is to analyze the different impacts of the determinants of free trade agreements (FTAs) based on the stage of the FTA discussions. By disaggregating the FTA formation process into four stages, this study finds that the influence of industry interest groups has a positive impact on FTA formation in the first stage, when two countries initiate the discussion by establishing a joint study. In contrast, it has a negative impact in the last stage, when signed FTAs need to be ratified in order to enter into force. Political institutions emphasized in the existing studies are likely to be significant in the initial stages, but lose their significance as the process moves forward. The findings of this study collectively support the hypothesis that a given FTA is the result of sectoral politics where interests and the power of industries have a significant influence on trade policy decision-making.

Tariff bindings and the dynamic formation of Preferential Trade Agreements

We show that multilateral tariff binding liberalization substantially impacts the nature and extent of Preferential Trade Agreement (PTA) formation. First, it shapes the nature of forces constraining expansion of Free Trade Agreements (FTAs). The constraining force is a free riding incentive of FTA non-members under relatively high bindings but an exclusion incentive of FTA members under relatively low bindings. Second, multilateral tariff binding liberalization shapes the role played by PTAs in the attainment of global free trade. Initially, tariff binding liberalization leads to Custom Union (CU) formation in equilibrium but in a way that undermines the pursuit of global free trade. However, further tariff binding liberalization leads to FTA formation in equilibrium and in a way that facilitates the attainment of global free trade. Our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of FTAs versus CUs.

Tariffs and formation of free trade agreements networks

AbstractThis paper examines the formation of bilateral free trade agreements (FTAs) on the basis of country heterogeneity in the tariff level. We demonstrate that a country's unilateral incentive to form an FTA depends on the relative magnitudes of the (negative) market concession effect and the (positive) market expansion effect, both of which are determined by the tariff levels of the two FTA partner countries. Global welfare is maximised when all country pairs form FTAs. Two countries in equilibrium are more likely to form an FTA when their tariff gap is smaller or when their tariff levels are neither very high nor very low. This finding is robust to several extensions of the model. Our preliminary empirical analysis provides some evidence for the finding.

Dynamic formation of preferential trade agreements: The role of flexibility

AbstractIn practice, free trade agreements (FTAs) vastly outnumber customs unions (CUs). Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs: individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. I show how the relative prevalence of FTAs versus CUs depends on the structure of market size asymmetry across countries and use these predictions to shed some light on FTA versus CU formation in Europe and South America.

Tariff Bindings and the Dynamic Formation of Preferential Trade Agreements

We show that multilateral tariff binding liberalization substantially impacts the nature and extent of Preferential Trade Agreement (PTA) formation. First, it shapes the nature of forces constraining expansion of Free Trade Agreements (FTAs). The constraining force is a free riding incentive of FTA non-members under relatively high bindings but an exclusion incentive of FTA members under relatively low bindings. Second, multilateral tariff binding liberalization shapes the role played by PTAs in the attainment of global free trade. Initially, tariff binding liberalization leads to Custom Union (CU) formation in equilibrium but in a way that undermines the pursuit of global free trade. However, further tariff binding liberalization leads to FTA formation in equilibrium and in a way that facilitates the attainment of global free trade. Our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of FTAs versus CUs.

Cross-Border Mergers and Acquisitions and the Role of Free Trade Agreements

ABSTRACTThis article investigates the impact of the formation of free trade agreements (FTAs) on cross-border mergers and acquisitions (M&As). Using the comprehensive M&As dataset of Securities Data Company, we find that FTA relationship is associated with more bilateral cross-border M&As. Second, the cross-border M&As activities between a FTA country-pair do not increase faster than the acquiring country’s total foreign acquisitions, suggesting no evidence of investment diversion effect of FTA. Third, we find that existing FTA relationship with other countries positively affect cross-border M&As between a FTA country-pair. But these third-country FTA effects differ for acquiring country and target country when we look at the ratio of a country-pair’s FTA relative to the acquiring country’s total foreign M&As. Moreover, by exploring the detailed information on acquiring and target firms, we reveal that the effect of FTA differs for horizontal, vertical and conglomerate cross-border M&As. Our results are robust to various measures of M&As activities and econometric methods used.

Global Supply Chains, Trade Agreements and Rules of Origin

Free Trade Agreements (FTAs) usually come with restrictions on the use of intermediate inputs in order for final goods to qualify for free trade. I focus on Rules of Origin (RoO), which limit expenses on nonmember country’s intermediate inputs. In a three-country FTA formation game, I introduce international trade in intermediate inputs and RoO restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, measured by their input shares in foreign final goods production, global free trade is less likely to be a stable equilibrium outcome. Free riding is the main problem preventing countries from liberalizing trade. Countries are better off being nonmembers of FTAs between the other two countries relative to global free trade. Rules of Origin can solve this problem by limiting the benefits countries get from other countries’ free trade agreements. In the case of asymmetric countries, an additional incentive exists for the smaller country not to join: such a country gives up more than it gains from joining an FTA for a sufficiently high degree of asymmetry in country sizes. I show that global free trade is a stable Nash Equilibrium under a larger region of asymmetric country parameter space in the case of RoO than without it. Therefore, it is shown that RoO is essential in order to attain global free trade.

Are global trade negotiations behind a fragmented world of “gated globalization”?

We show that global trade negotiations can prevent global free trade. In a simple model where global tariff negotiations precede sequential Free Trade Agreements (FTAs), we show FTA formation can expand all the way to global free trade in the absence of global tariff negotiations but global free trade never emerges when global tariff negotiations precede FTA formation. This result arises precisely because global tariff negotiations successfully elicit concessions from negotiating countries. Moreover, global tariff negotiations can produce a fragmented world of “gated globalization” where some countries form FTAs that eliminate tariff barriers among themselves while outsiders continue facing higher tariffs.

South Korea’s Free Trade Strategy and East Asian Regionalism: A Multistage Approach

South Korea is probably the most active state in the surging wave of East Asian regionalism. It has aggressively pursued free trade agreements (FTAs) with partners across the world in the past decade. My study focuses on the particular procedure of South Korea's FTA formation. I develop a multistage approach to examine how South Korea proposes, negotiates, signs, and ratifies FTAs with other countries. Using South Korea's data on trade with 122 trading partners from 1995 to 2012, the study offers a systematic examination of various South Korean FTA strategies at these stages. The findings demonstrate both similarities and differences between South Korea and its East Asian counterparts.

On the different geographic characteristics of Free Trade Agreements and Customs Unions

Casual observation reveals a striking phenomenon of Preferential Trade Agreements (PTAs): while Customs Unions (CUs) are only intra-regional, Free Trade Agreements (FTAs) are inter and intra-regional. Using a farsighted dynamic model, we endogenize the equilibrium path of PTAs among two close countries and one far country. Rising transport costs mitigate the cost of discrimination faced by the far country as a CU non-member and diminish the value of preferential access as a CU member. Thus, sufficiently large transport costs imply that an FTA is the only type of PTA that can induce the far country's participation in PTA formation. Unlike CU formation, FTA formation can induce participation because FTAs provide a flexibility benefit: an FTA member can form further PTAs with non-members but a CU member must do so jointly with all existing members. Hence, in equilibrium, CUs are intra-regional while FTAs are intra- and inter-regional.

Australia's Recent FTAs: Insights from Theory and Modelling on Rationale, Welfare Gains and Political Heat

This paper uses the theory of efficiency gains and terms‐of‐trade losses to explain the proliferation of free‐trade agreements (FTAs). It then focuses on Australia's FTAs with Japan, Korea and China in a discussion of gains from FTAs. Continuing that focus, the paper explains why FTAs (and trade policies more generally) are politically divisive. With regard to the China‐Australia FTA the conclusions reached in the paper are: (1) There will be a modest but worthwhile welfare gain for Australia; (2) The gain will be mainly from terms‐of‐trade improvement, not employment; (3) The Government is exaggerating the likely gain; (4) There will be losers as well as winners; (5) The Opposition is well within its rights to question labour‐market aspects of the agreement; and (6) The formation of FTAs is likely to be a continuing process and the Government would best serve the Australian public by encouraging evidence‐based discussion and providing answers to legitimate queries.

On the Path to Trade Liberalisation: Political Regimes in Trade Negotiations

AbstractThe number of free trade agreements (FTA) has increased substantially since 1990 despite efforts to promote multilateral trade liberalisation. While there is evidence on the determinants of FTA formation, still little is known on the processing of trade agreements, particularly regarding the pre‐implementation duration. This paper fills the research gap by using event data on the negotiation, the signing and the implementation of trade agreements. Duration analysis is employed to examine the connection between regime types and the lengths of the negotiation and the ratification stages. The results support the claim that higher levels of democratisation are associated with shorter negotiations, while political constraints lead to delays. Moreover, the depth of an agreement matters: a higher number of WTO‐X and WTO+ provisions do not only prolong the negotiation stage, but also the subsequent ratification. Against the background of potential anticipation effects of trade agreements, these results are of interest for exporting firms that assess the timing of implementation.

Immigration’s Impact on Bi-lateral Trade Formation: A Social Network Analysis Approach

In recent years, the proliferation of free trade agreements (FTA) has led to rapid economic boons and political security among nations. This study investigates whether the percentage of expats or permanent foreign residents plays a role in deciding which countries to partner with in bi-lateral FTAs. Previously, the reasons for FTA formation were believed to be primarily based upon economic, geographic, and political reasons. However, through the use of social network analysis, a larger picture can be mapped which allows for a more comprehensive understanding of key players in the current state of FTA formation in relation to the immigrant network that they share between them. More specifically, through computerized social network analysis, centrality can be calculated to determine the key players and the most central immigrant populations. When analyzing both the immigrant centrality in relation to FTA centrality, it becomes evident that there is a high correlation between the two factors. Thus, the findings highlight that immigration trends can be used as a predictor of FTA formation. As a result, it emphasizes the weight of immigration policy on the formation of bi-lateral FTAs.

Endogenous formation of free trade agreements in vertically related markets

We study the endogenous formation of free trade agreements (FTAs) in a symmetric three-country model with vertically related markets characterized by Cournot competition. We analyze the coalition-proof Nash equilibria in an FTA formation game in which each country forms an FTA with one, both, or none of its trading partners. We show that multilateral free trade is the unique stable equilibrium of the FTA formation game. In other words, FTAs act as building blocks for multilateral trade liberalization in the presence of vertical trade structures.

Institutional embeddedness of market integration: The formation of free trade agreements in 1957–2008

Why do certain pairs of countries establish free trade agreements (FTAs)? Existing studies on FTAs have examined internal attributes of countries such as neoliberalism or the interest of domestic political elites. FTAs as a type of market integration across national borders create high uncertainties in the absence of supra-national political authorities. To explain how countries cope with uncertainties, this article presents the institutional embeddedness argument to explain FTA formation among countries from 1957 to 2008, focusing on the effects of IGO ties and other types of relationships between countries. The findings demonstrate that, controlling for trade and political alliances, IGO ties positively enhance the chance of an FTA. Social and cultural IGOs also promote FTA formation as much as economic IGOs. More importantly, the effect of socio-cultural IGO ties increases as the distance between countries increases. These findings suggest that institutional ties between countries are an important channel for enhancing socio-cultural awareness, affinities, and trust as well as sharing economic and technical information for FTAs as an institutionalization project of market integration between countries.

Endogenous Formation of Free Trade Agreements: Evidence from the Zollverein's Impact on Market Integration

The Zollverein was arguably the most important free trade agreement of the nineteenth century. Although 1834 is the official date of the Zollverein's establishment, member states joined in a non-random sequence over several decades because the benefits of becoming a member increased, both as the size of the union increased, and as membership in the union became increasingly important for accessing foreign markets. We incorporate the endogenous effects of accession into an estimate of the economic impact of the Zollverein customs union. Our estimated effects are several times larger than simple estimates that do not take these effects into account.

Free Trade Networks on Non-tariff Barriers

In this paper, we examine the formation of free trade agreements on eliminating non-tariff barriers as a network formation game. A firm faces an import volume quota in a foreign country, which it cannot exceed but can be removed through bilateral free trade agreements. We focus on the stable free trade agreements networks, considering the case where each country determines the quotas of the foreign firms. We show that global free trade may not be achieved in any stable network. Moreover, all countries may be autarkic in a stable network. Finally, we demonstrate that our main results continue to hold regardless of the type of non-tariff barriers, such as import licences, import share quotas, and technical measures for increasing the production costs of foreign firms.

Trade-Diverting Free Trade Agreements, External Tariffs, and Feasibility

There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. Our model determines tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs as commonly done in the literature. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than ...

Trade-diverting free trade agreements, external tariffs, and feasibility

There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. Our model determines tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs as commonly done in the literature. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than an FTA assumed to fix external tariffs.