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Third-Country Effects on the Formation of Free Trade Agreements

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  • Chen, Maggie
  • Joshi, Sumit

Abstract

The recent proliferation of free trade agreements (FTAs) has resulted in an increasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the participating countries' economic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also crucially dependent on the participating countries' existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a significant fraction of FTA formations that would not otherwise be predicted by countries' economic characteristics.

Suggested Citation

  • Chen, Maggie & Joshi, Sumit, 2010. "Third-Country Effects on the Formation of Free Trade Agreements," MPRA Paper 23507, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23507
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    References listed on IDEAS

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    Cited by:

    1. Xiaohua Bao & Xiaozhuo Wang, 2019. "The Evolution and Reshaping of Globalization: A Perspective Based on the Development of Regional Trade Agreements," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 27(1), pages 51-71, January.
    2. Chen, Maggie Xiaoyang & Joshi, Sumit, 2010. "Third-country effects on the formation of free trade agreements," Journal of International Economics, Elsevier, vol. 82(2), pages 238-248, November.
    3. Osnago,Alberto & Rocha,Nadia & Ruta,Michele, 2015. "Deep trade agreements and vertical FDI : the devil is in the details," Policy Research Working Paper Series 7464, The World Bank.
    4. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    5. Denise Eby Konan & Keith E. Maskus, 2012. "Preferential Trade and Welfare with Differentiated Products," Review of International Economics, Wiley Blackwell, vol. 20(5), pages 884-892, November.
    6. Gianluca Orefice, 2015. "International migration and trade agreements: The new role of PTAs," Canadian Journal of Economics, Canadian Economics Association, vol. 48(1), pages 310-334, February.
    7. Yener Kandogan & Jens Hiller, 2018. "Alliances in international governmental organizations, regional trade agreement formation, and multinational enterprise regionalization strategy," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(6), pages 729-742, August.
    8. Teteryatnikova, Mariya, 2018. "R&D in trade networks: The role of asymmetry," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 307-350.
    9. James Lake, 2017. "Free Trade Agreements As Dynamic Farsighted Networks," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 31-50, January.
    10. May, D. & McCorriston, S., 2018. "The role of Centrality in Preventing Free Trade of Processed Agricultural Goods under Imperfect Competition," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277262, International Association of Agricultural Economists.
    11. NAGEL Daniel, 2017. "The Fate of 21st Century Multilateralism," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 02, June.
    12. Jeffrey H. Bergstrand & Peter Egger, 2011. "What Determines BITs?," CESifo Working Paper Series 3514, CESifo Group Munich.
    13. Tan LI & Larry D. QIU, 2015. "Beyond Trade Creation: Free Trade Agreements and Trade Disputes," Working Papers DP-2015-28, Economic Research Institute for ASEAN and East Asia (ERIA).
    14. Hiroshi Daisaka & Taiji Furusawa, 2014. "Dynamic Free Trade Networks: Some Numerical Results," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 469-487, August.
    15. Carlo Piccardi & Lucia Tajoli, 2015. "Are Preferential Agreements Significant for the World Trade Structure? A Network Community Analysis," Kyklos, Wiley Blackwell, vol. 68(2), pages 220-239, May.
    16. Bergstrand, Jeffrey H. & Egger, Peter, 2013. "What determines BITs?," Journal of International Economics, Elsevier, vol. 90(1), pages 107-122.
    17. Innwon Park & Soonchan Park, 2017. "Formation of interdependent regional trade agreements and production networks," The World Economy, Wiley Blackwell, vol. 40(10), pages 2032-2055, October.
    18. Willert, Bianca, 2017. "How intermediates trade affects the formation of free trade agreements: A study analyzing pairwise trade flows of 70 countries," Thuenen-Series of Applied Economic Theory 147, University of Rostock, Institute of Economics.
    19. Juyoung Cheong & Do Won Kwak & Kam Ki Tang, 2015. "Can Trade Agreements Curtail Trade Creation and Prevent Trade Diversion?," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 221-238, May.
    20. Angela Abbate & Luca De Benedictis & Giorgio Fagiolo & Lucia Tajoli, 2012. "The International Trade Network in Space and Time," LEM Papers Series 2012/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    21. Elie Appelbaum & Mark Melatos, 2018. "Are Customs Unions Really So Scarce?," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 391-404, December.
    22. Yi Yi Mon & Seunghoo Lim & Makoto Kakinaka, 2019. "Multiplex Relations between States: Coevolution of Trade Agreements and Political Alliances," Sustainability, MDPI, Open Access Journal, vol. 11(14), pages 1-24, July.
    23. Katerina Gradeva & Dany Jaimovich, 2014. "Multilateral determinants of regionalism revisited," The Review of International Organizations, Springer, vol. 9(2), pages 163-203, June.
    24. Scott L. Baier & Jeffrey H. Bergstrand & Ronald Mariutto, 2014. "Economic Determinants of Free Trade Agreements Revisited: Distinguishing Sources of Interdependence," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 31-58, February.
    25. Jochmans, K. & Verardi, V., 2019. "Instrumental-Variable Estimation of Gravity Equations," Cambridge Working Papers in Economics 1994, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

    free trade agreements; third-country effect; loss sharing; concession erosion;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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