DP16098 The Political Economy of Preferential Trade Agreements: An Empirical Investigation

Author(s): Giovanni Facchini, Peri Silva, Gerald Willmann
Publication Date: May 2021
Keyword(s): Customs Unions, Free Trade Areas, Income inequality, trade imbalances
JEL(s): F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16098

We develop a political economy model to study the decision of representative democracies to join a preferential trading agreement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis shows that bilateral trade imbalances and income inequality are important factors determining the formation of PTAs, whereas the patterns of geographic specialisation explain whether a CU or an FTA will emerge. Our empirical analysis - using a comprehensive panel dataset spanning 187 countries over the period 1960-2015 - provides strong support for these predictions.