《Economic determinants of free trade agreements》.pdf

Journal of International Economics 64 (2004) 29– 63 /locate/econbase Economic determinants of free trade agreements Scott L. Baiera,b, Jeffrey H. Bergstrandc,* a John E. Walker Department of Economics, Clemson University, Clemson, SC 29634, USA b Research Department, Federal Reserve Bank of Atlanta, Atlanta, GA 30309, USA c Department of Finance and Business Economics, Mendoza College of Business, Kellogg Institute for International Studies, University of Notre Dame, Notre Dame, IN 46556, USA Received 29 June 2001; received in revised form 27 June 2002; accepted 4 December 2002 Abstract The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements (FTAs) and of the likelihood of FTAs between pairs of countries using a qualitative choice model. We develop this econometric model based upon a general equilibrium model of world trade with two factors of production, two monopolistically- competitive product markets, and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents. The empirical model correctly predicts, based solely upon economic characteristics, 85% of the 286 FTAs existing in 1996 among 1431 pairs of countries and 97% of the remaining 1145 pairs with no FTAs. D 2003 Elsevier B.V. All rights reserved. Keywords: Free trade agreements; International trade; Qualitative choice models JEL classification: F11; F12; F15 1. Introduction Free trade areas may well be an endogenous variable—that is, a response to, rather than a source of, large trade flows. . .. Presumably, (governments) are more likely to form free trade areas, (if) the benefits outweigh the costs. (Lawrence,