Why Do Countries Form Regional Trade Agreements? A Discrete-Time Survival Analysis
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Why Do Countries Form Regional Trade Agreements? A Discrete-Time Survival Analysis Teresa L. Cyrus 1 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper seeks to determine why countries form regional trade agreements. Using bilateral data from 1950 to 2013 for 468 trade agreements and 179 countries, I use survival analysis to examine the factors that determine the likelihood of two countries entering into a trade agreement at any point in time. Potential explanatory variables include prior trade flows, export distance, GDP, per-capita GDP, geography, culture, and institutions. The results show that trade, per-capita GDP, and similarities in culture and institutions increase the likelihood that two countries will form a regional trade agreement. Larger, more distant, and more isolated countries are less likely to form an RTA, as are country-pairs that are different in size. Keywords Trade . Regional trade agreements . Duration . Survival JEL Classification F13 . F14 . F15 . E02
1 Introduction The Doha Round of multilateral trade negotiations under the auspices of the World Trade Organization commenced in 2001 but has since stalled, with no further movement on the horizon. Baldwin (2008 and 2011), among other commentators, notes that the lack of attention paid to multilateral talks is at least partly due to a focus on bilateral or regional agreements, as regional agreements have proven easier to negotiate than multilateral agreements. As shown in Fig. 1, over the 1950–2013 period, the popularity of regional trade agreements has risen greatly; in 1950, there were no regional trade agreements, but by 2013, almost 27% of country-pairs had a trade agreement with each Note: The author thanks the editor and two anonymous referees for very helpful comments and suggestions.
* Teresa L. Cyrus [email protected]
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Department of Economics, Dalhousie University, Halifax, NS B3H 4R2, Canada
Cyrus T.L. 30 25 20 15 10
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Fig. 1 Percentage of Country-Pairs with RTAs, 1950–2013
other in place. According to the WTO, the only country in 2015 lacking any trade agreements was Mongolia, but by 2016, even Mongolia had entered into a regional trade agreement, with Japan. This paper seeks to determine why countries form regional trade agreements, and proposes several hypotheses. The first is that countries enter into trade agreements to formalize existing trade relationships; a high level of prior trade would therefore be expected to lead to a future trade agreement. A second possibility is that countries enter into trade agreements to take advantage of either their similarities or their differences; the product of and the difference in a country-pair’s total and per-capita GDP may help to explain whether they move to a free trade agreement. Third, geography likely influences the decision to join a regional trade agreement. Fourth, countries may be more likely to enter
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