Why Some Regional Trade Agreements Work: Private Rents, Exit Options, and Legalization

Regional trade agreements (RTAs) proliferate in the developed and developing world. However, there is wide variation in both the institutional structure of these RTAs and the degree to which they achieve their goals. Particularly in the developing world, RTA dispute-settlement mechanisms are formed but rarely employed; ambitious tari cuts are announced but never implemented; and promised trade ows do not quite materialize. Yet the study of these agreements has been mostly limited to their trade-enhancing e ects. Moreover, empirical researchers tend to treat all RTAs as like units. What accounts for the di erent levels of not only \thick" institutional design, but also of implementation of that design | since the two are at times scarcely correlated? We present a theoretical framework as well as empirical evidence to explain the de facto as well as the de jure institutional design of these agreements. We argue that the conditions that produce e ective and broad agreements are not a function of endogenous design, but rather of exogenous factors. If countries within the RTA have fewer options for world trade beyond the RTA, they will almost always develop strong institutions, such as mechanisms for dispute settlement, and make substantial use of them. Similarly, environments where member states are accustomed to using the public sector as a source of private rents, such as employment opportunities, will create broad agreements that are high in scope. We present a new cross-regional dataset, compiled from expert surveys, to test these arguments.