Although more than half of the 240 international economic integration agreements (IIAs) were formed in the past 15 years, econometric evidence reveals small positive (even negative) effects of seemingly successful IIAs on members' trade. Such estimates are biased because countries select systematically into IIAs. This research will develop an empirical framework (based on a general equilibrium model) suggesting economic and political economy determinants of formation of IIAs. The model lends itself to econometric analysis (discrete choice models, gravity equations) that sheds light on causes and consequences of the growth of regionalism.
A central notion is that discrete IIA indexes are endogenous and functions of observable economic and political variables. This research builds on recent work which shows that countries with free trade associations (FTAs) tend to share economic characteristics that the theory suggests should enhance members' welfare. This research generalizes this static theoretical and empirical framework for explaining the growth of regionalism. The researchers will construct a panel data set categorizing all IIAs among 100 countries for the years from 1960 to 2000. The theoretical model will be extended to analyze relative welfare benefits of preferential vs. free trade agreements, FTAs vs. customs unions, and customs unions vs. common markets. Preliminary evidence suggests that FTAs' trade effects have been underestimated by as much as 90% after accounting for endogeneity and non-linearities.
The results of this research will aid national policymakers addressing three questions: With whom, if anyone, should a country form an integration agreement? What should be the depth and breadth of integration? How will integration affect a country's trade? The research should help address a shortcoming in the international trade literature: ii there is not now a careful, generally accepted analysis of the pattern of multilateral trade when transport costs matter. The data that will be assembled for this project will be extremely helpful to other researchers FTAs.
