DP8595 Weak Governments and Trade Agreements

Author(s): Jean-Louis Arcand, Marcelo Olarreaga, Laura Zoratto
Publication Date: October 2011
Keyword(s): Credibility, Political economy, Trade agreements
JEL(s): D72, F13, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8595

The recent theoretical literature on the determinants of trade agreements has stressed the importance of political gains, such as credibility, as a rationale for trade agreements. The empirical literature, however, has lagged behind in the estimation of the economic gains or losses associated with these politically motivated trade agreements. This paper fills that gap by providing estimates of the economic impact of politically and economically motivated trade agreements. We find that credibility gains play a role in increasing the probability of two countries signing an agreement. Moreover, agreements with a stronger political motivation are more trade creating than agreements that are signed for pure market access / economic reasons, and the value for the government of solving its time inconsistency problems through trade agreements is estimated at an average of 1.8% of GDP, which compares quite well with the traditional estimates of the economic gains from trade.