Mansfield and Milner PTAhard times APSA 2015hmilner/working papers... · · 2015-08-26downturns in the business cycle. A Theory of PTAs in Hard Times It is widely recognized that

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TheDomesticPoliticsofPreferentialTradeAgreementsinHardTimes

EdwardD.Mansfield HelenV.MilnerDepartmentofPoliticalScience DepartmentofPoliticsUniversityofPennsylvania PrincetonUniversityPhiladelphia,PA19104 Princeton,[email protected] [email protected]

PreparedfortheannualmeetingoftheAmericanPoliticalScienceAssociation,SanFrancisco,CA,September3‐6,2015.

AbstractWepresentatheoryofwhysomecountriesnegotiatetradeagreementsduringeconomicdownturns.Wearguethatpoliticalleaderscangainfromsuchagreementsbecauseofthesignalstheysendtotheirpublics.Publicsarelesslikelytoblameleadersforbadeconomicconditionswhentheyhaveimplementedsoundeconomicpolicies,suchassigningandimplementingagreementsdesignedtoliberalizeandexpandtrade.Leadershaveparticularreasontoseekthistypeofinsuranceiftheycompeteforofficeinacompetitivepoliticalenvironment.Themoredemocratictheirpoliticalsystemis,themoretheycangainfromimplementingtradeagreements.Weevaluatethisargumentbyanalyzingallpreferentialtradeagreements(PTAs)ratifiedbycountriessince1951.WefindthatdemocraticcountriesareespeciallylikelytoratifyPTAsduringhardeconomictimes.

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Introduction

Thefinancialcrisisof2008‐2009stimulatedwidespreadfearsthatprotectionism

wouldriseacrosstheglobe.Observersexpressedconcernthatthisepisodewould

resembletheGreatDepression,whichwasaccompanied,ifnotdeepenedby,theglobal

spreadofprotectionism(Kindleberger1973).Indeed,thereceivedwisdomisthat

economicdownturnsfrequentlypromptcountriestoraisetradebarriers(Conybeare1983;

Cassing,McKeown,andOchs1986;BoharaandKaempfer1991;BagwellandStaiger2003).

Surprisingly,however,thecrisisgeneratedlittleprotectionismandthevolumeoftrade

recoveredquicklyafterthedownturn.TheleadersoftheG20pledgedeachyearfrom2008

to2011thattheywouldresistthetemptationtoraisetradebarriers.1AnOECDstudy

foundthattheseleaders’effortshadsucceededinavertingthegrowthofprotectionismand

otherstudieshavearrivedatasimilarconclusion(OECD2010;Bown2011;

VandenbusscheandViegelahn2011;Kee,Neagu,andNicita2013;Gawande,Hoekman,and

Cui2014).

Notonlydidheadsofstateworktoavoidaspikeinbarrierstooverseascommerce

duringthefinancialcrisis,leadersintheAmericas,Europe,andEastAsiawerenegotiating

tradeagreementsduringthisepisode,mostnotablytheTrans‐PacificPartnership(TPP),

theTransatlanticTradeandInvestmentPartnership(TTIP),andtheRegional

1Seehttp://www.nytimes.com/2008/11/16/washington/summit‐text.html?pagewanted=all;http://www.international.gc.ca/trade‐agreements‐accords‐commerciaux/agr‐acc/wto‐omc/pledge‐engagement.aspx?view=d.

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ComprehensiveEconomicPartnership(RCEP).Thisdevelopmentwasnocoincidence.

Rather,asweargueinthispaper,itreflectsabroadertendencyforleadersofdemocratic

countriestoformtradeagreementsduringhardeconomictimes.

Morespecifically,wearguethatdemocraticleadersmaychoosetonegotiateand

implementtradeagreementsbecausetheyyieldpoliticalaswellaseconomicbenefits.

Suchagreementscanhelpthemretainofficeinthefaceofeconomicdownturns,especially

incountrieswithcompetitivepoliticalsystems.Indemocracies,leadershavetobe

concernedthatcitizenswillholdthemresponsibleforthedownturnandvotethemoutof

office.Policiesdesignedtoliberalizeandpromotetheflowoftradesignaltovotersthatthe

downturnwasnottheproductofrent‐seekingorincompetence,butinsteadwasdueto

circumstancesbeyondtheleader’scontrol.

Wetestthisargumentbyanalyzingtheformationofpreferentialtradeagreements

(PTAs),whichareabroadclassofinternationalinstitutionsthatincludecommonmarkets,

customsunions(CUs),freetradeareas(FTAs),andeconomicunions.Theseagreements

havemarkedthegloballandscapeforcenturies,buthaveproliferatedespeciallyrapidly

overthepasthalf‐century.PTAsaredesignedtofostereconomicintegrationamong

member‐statesbyimprovingandstabilizingtheaccessthateachmemberhastotheother

participants’markets.Theseagreementsarethusasourceofliberalizationamongthe

contractingparties,althoughtheyalsodiscriminateagainstthirdparties(Freundand

Ornelas2010).Consistentwithourargument,wefindthatdemocraciesexperiencinghard

timesareparticularlylikelytoformPTAs.DuringtheperiodsinceWorldWarII,

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democraticcountrieshavedisplayedagreatertendencytoestablishtheseagreementsthan

theirnon‐democraticcounterparts,andtheyhavebeenmostlikelytoenterPTAsduring

downturnsinthebusinesscycle.

ATheoryofPTAsinHardTimes

ItiswidelyrecognizedthatPTAsinfluencetheflowoftradeandinvestment,butwe

arguethatnationalleadersoftenconcludetheseagreementsforpoliticalaswellas

economicreasons(MansfieldandMilner2012).WealsoarguethatleadersenteringaPTA

realizedomesticpoliticalbenefitsthataredifficulttoobtainthroughunilateraltradepolicy

measuresalone.Arationalgovernmentwillonlyformanagreementwithothercountriesif

theexpectedbenefits—bothdomesticandinternational—ofdoingsoexceedthecostsof

negotiatingandratifyingtheagreement.Tradeagreementsgenerateimportantbenefits

forbothgovernmentsandthepublic.Theycanconveyinformationtothepublicand

interestgroupspreferringfreetradeaboutthenatureandactivitiesofleaders.Such

informationcancontributetopoliticalsupportforleaders,helpingthemretainoffice.

Leadersmaypreferdifferentlevelsofprotection,basedontheweightsthatthey

assigntothebenefitsofrentsversussocialwelfare(Gawande,Krishna,andOlarreaga

2009).Promotingsocialwelfareyieldspoliticalsupportamongthepublicandfreetrade

interestgroupsthathelpslengthenaleader’stenureinoffice.Thepublicandthesegroups,

however,generallycannotbecertainofwhatbalancebetweenrentsandsocialwelfarea

governmenttrulydesires.Theyneedsomekindofreassuranceaboutthemotivesand

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actionsofthegovernment.Thepublicalsohasheterogeneouspreferencesabouttrade

policy;someindividualspreferhighlevelsofprotection,whereasotherspreferfreertrade.

Weassumethatthemedianmemberofsociety,whocommandstheattentionofleaders,

preferssomepositiveleveloftradebarriers(thatis,sheisnotcommittedtoafreetrade

policy).Sincetradebarrierscreaterentsforcertaininterestgroups,office‐holdersmay

seektoraisebarriersbeyondthelevelpreferredbythemedianindividualtoextractthese

rents.Thepublic,whichdoesnotgainfromtheserentsandprobablylosesbecauseofthem,

doesnotknowtheextentofgovernmentrent‐seekingsincecitizensdonotknowtheir

leaders’exacttradepreferencesorpolicies.Governmentswouldliketolimittheamountof

protectiontheyfurnishsinceithurtstheeconomyinthelongrunand,totheextentthat

voterscastballotsbasedoneconomicconditions,damagestheirreelectionprospects.

Butgovernmentsmaybetemptedtoprovideprotectiontocertaindomesticgroups.

Rentsforgovernmentsrisewiththelevelofprotection.Althoughleadersmaynotdesireas

muchprotectionaskeyinterestgroupsdemand,theymaybetemptedbytherentsthat

accruefromfurnishingprotection.Facedwithspecialintereststhatdemandprotection,

particularlywhentheeconomysours,leadersneedtofindwaystoreassurethemass

publicthattheyarenotbeingcapturedbyprotectionistinterestsandthattheyaremaking

soundforeigneconomicpolicy.Increasingtradebarriersmaywinleaderssupportfrom

someimport‐competinginterests,butdoingsocanalsoantagonizepro‐tradeinterest

groupsaswellasthegeneralpublic,whichwillbeharmedifprotectionismcontributesto

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slumpingeconomicgrowth.PTAsprovideamechanismforleaderstomanagesuch

societalpressures.2

Othershavemadesimilarargumentsabouttheroleoftradeagreementsand

domesticpolitics(MaggiandRodriguez‐Clare1998and2007;StaigerandTabellini1999;

Mitra2002).MaggiandRodriguez‐Clare(1998),forexample,arguethatgovernmentsmay

formtradeagreementstoprovidecrediblecommitmentsvis‐á‐visthepublicandinterest

groups.Theyshowthatgovernmentsfaceatimeinconsistencyproblem.Manyinterest

groupsdemandprotectionisttradepolicy,especiallyduringeconomicdownturns.

Althoughgovernmentsfinditdifficulttoresistthesedemands,protectioncauses

investmentdistortions,whichharmthegovernmentpoliticallyinthelongerrunby

reducingefficiencyandgrowth.Governmentsthenusetradeagreementstomakepolicy

commitmentsthatarecredibleandpreventinterestgroupsfrompressingforheightened

tradebarriersinthefuture.

Forleaders,concludingatradeagreementcanhelptoreassurethepublicthatthey

aremakingsoundforeigneconomicpolicy.Leaders,however,alsoworryaboutthe

domesticcostsinvolvedinratifyingagreements.Balancingthesetwoforcesisacentral

partofadecisionmaker’scalculationaboutwhethertosignaPTA.Acountry’sregimetype

iscrucialinthisregard.

2WerecognizethatPTAsmayhaveimportanteconomiceffectsandthatleadersmaybemotivatedbyadesiretoachieveeconomicbenefits.Ourpoint,however,isthattradeagreementsalsohaveimportantdomesticpoliticaleffectsthathavenotbeensufficientlyappreciated.

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DemocracieshavegreaterpoliticalincentivestoenterPTAsthanothercountries.

Thefree,fair,andregularelectionsthatarethehallmarkofdemocraciesmotivateleaders

tosignsuchagreements.Leadersinvarioustypesofpolitiesarecaughtbetweenthe

pressuresofspecialinterestgroupsandthepreferencesofvoters.Somespecialinterests

pressforpolicies—suchasprotectionisttradepolicies—thatbenefitthembutadversely

affecttheoveralleconomy.Headsofstatemaywanttosatisfytheseinterestgroupsin

exchangeforbenefitslikecampaigncontributionsorothersourcesofpoliticalsupport.But

givingintoallinterestgroupdemandswouldhaveveryharmfuleconomicconsequences

andcouldimperiltheirholdonoffice.

Leaders,atthesametime,haveahardtimeconvincingthepublicthattheywillnot

accedetospecialinterestdemands.AsMaggiandRodriguez‐Clare(1998)pointout,

governmentsfaceatimeinconsistencyproblemvis‐à‐visinterestgroups.Theywouldlike

tobeabletoresistsomeprotectionistdemands;butwhensuchdemandsarise,

governmentsareusuallybetteroffgivingintoeachgroupthatpressesforprotection.The

publicandfreetradeinterestgroupsknowthisandareharmedbygovernmentrent‐

seeking(MaggiandRodriguez‐Clare1998and2007).Theycanthreatenactiontolowerthe

incumbentgovernment’sprobabilityofretainingoffice.Buttheyalsofaceaninformational

problem.Membersofthepublicmaynotknowthepreferencesofortheexacttradepolicy

chosenbythegovernment,andthustheycannotdistinguishperfectlybetweenadverse

exogenouseconomicshocksandtheextractivepoliciesofleaders.Aneconomicdownturn

couldbecausedbyeitherhighlyprotectionistpoliciesoranexogenousshock,suchasa

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globalrecessionoraninternationalcrisis.Bothevents,forexample,mightincreasethe

pricethatthepublicpaysforgoodsandservices,andthusdampenthepublic’spolitical

supportforthegovernment.

Leaders,inturn,wouldliketofindawaytodemonstratetothepublicthatpoor

economicperformanceisnottheresultofextractivepolicies,therebyreducingthe

domesticpoliticalcoststhattheyface.Whiletheycouldchoosetounilaterallylowertrade

barriers,doingsoistimeinconsistent.Leaderscanreducebarriers,buttheyandthepublic

knowthatfuturespecialinterestdemandsforprotectionmaywellbemet.Soheadsof

governmentmustfindotherwaystoreassurethepublicthattheywillnotengagein

excessiveprotectionism.

Onewayofdoingsoisbyenteringintoaninternationaltradeagreement,whichis

bothavisiblecommitmenttorestrictprotectionismandaninstitutionalreassurancetothe

publicandfreetradeinterestgroupsthatarelativelyopentradepolicyhasbeenadopted.

Theagreementcommitsparticipatingcountriestoaleveloftradebarriersbeloweach

government'sidealunilaterallevelanditservesasamonitoringmechanism.Other

member‐statescanuseaspectsofthetradeinstitution(suchasthedisputesettlement

mechanismincludedinvarioustradeagreements)tosignaltoeachparticipating

government’ssocietyifitstradebarriersriseabovetheagreeduponlevel.Theagreement

ispublicandthereforeprovidesinformationthatdomesticgroupscanusetomonitortheir

leaders.Themonitoringthataninternationaltradeagreementprovidescanhelppolitical

leadersovercometheirreassuranceproblem.

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Thus,enteringintoatradeagreementcanbolstersupportforagovernment,even

whentheeconomyexperiencesadownturn.Whenelectionstakeplaceinthefaceof

adverseeconomiccircumstances,citizensmayblameincumbentsandvotethemoutof

office.Assuch,chiefexecutivesneedtofindwaystoreassurethepublicandother

domesticgroupsthateconomicdownturnsarebeyondtheircontrolandarenotsimplyan

outgrowthofleadersbucklingundertothedemandsofprotectionistgroups.3

PTAsprovidesuchapoliticalreassurancemechanism.Theseagreementsallow

leaderstocommittolowertradebarriersandsignalvotersthatleaders’tradepoliciesdid

notdirectlycausehardeconomictimes.Inturn,theseleadersaremorelikelytoremainin

officesincevotershavereasontoviewthemascompetenteconomicstewards,evenduring

recessions.Themoreelectoralcompetitionthatexists,themorethatleadershavetoworry

aboutbeingejectedfromofficeandthegreatertheirneedtoreassurethepublic.Hence,we

arguethatdemocraticgovernmentsshouldbemorelikelytosigntradeagreementsthan

othergovernments.

Forautocracies,thecalculationsdiffer.Interestgrouppressuresforprotectionism

inautocraciesvestleaderswithanincentivetoresistenteringPTAsthatreducetherents

3Mitra(2002)buildsontheanalysisconductedbyMaggiandRodriguez‐Clare(1998),butdemonstratesthatthecommitmentproblemforpoliticiansismoregeneralthantheyposit.ThedemandforaprecommitmenttoanFTAdoesnothavetobedrivenbythepossibilityofcapitalmisallocationalone,asMaggiandRodriguez‐Clare(1998)argue,orbythepossibilityoforganizationalcostsarisingintheexpectationofprotection.Demandforsuchanagreementcanoccurwhengovernmentsorinterestgroupsfaceresourcecostspriortolobbyingbecauseoftheactionstakenintheexpectationofsuccessfullobbying.Mitrashowsthattheinabilityofgovernmentstocommitunilaterallytoresistprotectionistpressuresbyinterestgroupscreatessubstantialcostsforgovernments.Undercertainconditions,thesecostscandrivegovernmentstoseekinternationaltradeagreements.

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theycanprovidetosupporters.Equally,autocratshavelessneedtoreassurethepublic

thattheyarecompetenteconomicdecisionmakerssinceelectoralcompetitiondoesnot

determinetheirfate.Consequently,autocratshavelessincentivetoenterintotrade

agreementsthantheirdemocraticcounterparts.

OurargumentfocusesonpoliticalleadersbecausetheyinitiateandratifyPTAs.But

interestgroupsmayalsoplayanimportantrole.Indeed,manytheoriesoftradepolicythat

examinedomesticpoliticsfocusoninterestgroupssincetheyhavetheresourcesand

coherencenecessarytoovercomecollectiveactionproblemsandexertinfluenceon

politicians(GrossmanandHelpman1994;Gawande,Krishna,andOlarreaga2009;Manger

2009).Someinterestgroupspreferfreetrader;othersaremoreprotectionist.Fromour

standpoint,opponentsoftradeopennessaremostimportantwhentheyareabletoexert

influenceasvetoplayersinthenegotiationandratificationofPTAs.Wethereforeaccount

forsuchvetoplayersinourempiricalanalysis.However,whileinterestgroupshelpto

shapethedemandforPTAs,theydonotcontrolthepoliticalprocessthroughwhichthese

agreementsareinitiatedandratified.Attheendoftheday,politicalleadersmustinitiate

andadvancetheseagreements,andtheirincentivestodosoareourprimaryfocus.

Ourargumentassumesthatthemedianmemberofthepublicisnotstrongly

protectionist.Weassumethatthemedianmemberofsocietydoesnotopposetrade

barrierscompletely,butthatshealsosupportstradeenoughthatleaderswanttopursue

tradeagreements.PTAsrarelyeliminateallbarrierstotrade;moretypicallytheylower

somebarriersandliberalizetheeconomyinotherways.Butdoesthepublicdesiresuch

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exposuretotheinternationaleconomy?ThePewResearchCenterGlobalAttitudesSurvey

examinedattitudestowardtradeinalargenumberofcountriesin2002,2007,and2008.

Inallofthesecases,anoverwhelmingmajorityofrespondentsfeltthattradewasgoodfor

theircountry.Othersurveys,suchastheLatinobarometerandAfrobarometer,alsoshow

majoritysupportforfreetradeacrossthoseregions(MansfieldandMilner2012:31‐32).

Insum,publicopinionpollsincountriesinEurope,LatinAmerican,andAfricaprovide

supportfortheclaimthatthemedianmemberofthepublicviewstradefavorably,

providingsomejustificationforourassumptionthatthepublictendstobemore

supportiveofopentradethanofprotectionism.

Anotherclaimwerelyonisthatsomemembersofthepublicandcertaininterest

groupsareawareofthetradeagreementstheirgovernmenthassignedandgenerallyview

suchaccordsfavorably.Publicopiniondatasuggeststhat,inmanycountries,thereisa

publicawarenessofandafavorableattitudeaboutinternationaltradeaccords.Manyofthe

samesurveysnotedabove,aswellastheInternationalSocialSurveyProgramme,which

havebeen conductedinnumerouscountriesovertime provideevidencethat largemajority

ofthosesurveyedhadheardquiteabitaboutthemajorPTAstheircountrywasinvolvedin,

andmostrespondentsfeltthatbeingamemberofthatPTAbenefitedhisorhercountry

(MansfieldandMilner2012:31‐32).Furthermore,weknowthattheinstitutionssetupby

tradeagreementscanhelptransmitinformationtodomesticgroupsaboutgovernments’

behavior.ManyPTAshavebodiesthatreportaboutthesignatories’behavioroverregular

intervals(Martin2000:chap.7).Thelegalizeddisputeprocesses,forinstance,often

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associatedwithinternationalinstitutions,suchastheWorldTradeOrganization’s(WTO’s)

disputesettlementmechanism,alsoplayanimportantroleintransmittinginformation

aboutthepoliciesofmembergovernmentstopreviouslyuninformedsub‐subnational

actors,suchasthevotingpublic.

Ourargumentalsoemphasizeshowinternationalagreementscanhelpleaders

reducethepotentialforlostpoliticalsupportbyreassuringthepublicinadvanceabout

theirintentions.Butdoessocietycareaboutwhetherthegovernmenthassignedand

abidedbyPTAs?Recentpublicopinionresearchclaimsthatitdoes.Herrmann,Tetlock,and

Diascro(2001),forexample,suggestthatvotersvaluetradeagreementsandbelievethey

areneededtosupportanopentradingsystem,implyingthatleadersmaypayapolitical

priceforviolatingtherulesofsuchinstitutions.

RegimeType,theBusinessCycle,andPTAs

Wehavearguedthatvotersinademocracyconsiderthestateoftheeconomywhen

goingtothepolls.Thus,governmentsarelikelytobepenalizedwhentheeconomy

performsbadly.Votersassumethatsuchdownturnsareatleastpartlyattributabletothe

policiesenactedinresponsetointerestgrouppressures.Assuch,governmentsfacea

credibilityproblem;votersaremorelikelytoremovethemfromofficeinbadeconomic

times,eveniftheydidnotgiveintospecialinterestdemandsandover‐protectthe

economy.Leadersthereforeseekwaystodemonstratetothepublicthattheyarenot

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overlysolicitoustospecialintereststhatdemandprotection.Onewaytodemonstratethis

istosignatradeagreement.

Inpoliticalsystemswherethepubliccannotvoteleadersoutofoffice,thisproblem

islesssevere.Insystemswithcompetitiveelections,bycontrast,theproblemisacute.The

moreleaders’fortunesdependonthevotingpublic,themoreincentivestheywillhaveto

findmechanismstoreassurethepublicthattheyhavenotgivenintospecialinterest

demandsandthushurttheeconomy.Consequently,themoredemocraticacountryis,the

greatertheincentiveforleaderstomakeacrediblecommitmenttoanopentradepolicy

andhencethemorelikelytheyaretosigninternationaltradeagreements.

Thisdynamicisespeciallypronouncedduringhardeconomictimes,whenleaders

areoftensuspectedofhavingchosenpoliciesthatfavoredspecialinterestsandcontributed

tothedownturn.LeadersthusseekmembershipinPTAsduringdipsinthebusinesscycle

todemonstratethattheyarenotoverlyinfluencedbyprotectionistinterests.Forthechief

executiveofcountriesmarkedbycompetitivepoliticalsystems,thesepressuresare

especiallypronounced.Thus,weexpectdemocraciestorespondtoeconomicdownturnsby

initiatingandratifyingPTAsevenmorefrequentlythantheydoingoodtimes.

Ourdata,whicharedescribedingreaterdetailbelow,revealnumerouscaseswhere

ademocracyratifiedtradeagreementsduringeconomichardtimes.Japan,forinstance,

ratifiedaPTAwithSingaporein2002(Japan’sfirst)inthefaceofaneconomicdecline.

IsraelsignedagreementswithBulgariaandRomaniain2001,duringaneconomicslump.

Zambia,anewdemocracythathadjusthelditsfirstmulti‐partyelectionsindecades,joined

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thebothSouthernAfricanDevelopmentCommunity(SADC)andtheAfricanEconomic

Communityduringaneconomicdownturnin1992.From1991to1993,Switzerland

concludedalargenumberofPTAswithEastandCentralEuropeancountries,aswellasone

withIsraelundertheEFTAumbrella,inaperiodwhenitexperiencedpooreconomic

performance.Finally,aswementionedearlier,manyofthecountriesnegotiatingand

formingtradeagreementsduringtheGreatRecessionweredemocracies.

Ourargumentemphasizestheeffectsofthebusinesscycleindemocracies,butthat

ishardlytheonlyfactorsguidingtheestablishmentofPTAs.Domesticinterestgroups,

internationalpolitics,andeconomicfactorshavealsobeenlinkedtoPTAformationandwe

trytoaccountfortheseinfluencesinourempiricalanalysis.

AnEmpiricalModelofPTAFormation

Ouranalysiscentersonestimatingthefollowingmodel:

PTARatificationij=0+1Democracyi+2GDPi+3(Democracyi×GDPi)+4

VetoPlayersi+5ExistingPTAij+6Tradeij+7GDPi+8Disputeij+9Allyij+

10FormerColonyij+11Contiguityij+12Distanceij+13Hegemony+14

Post‐ColdWar+15GDPRatioij+16%DyadsRatifyingPTA+17Global

BusinessCycle+β18GATTij+ij

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TheDependentVariable

IntheprocessofconcludingaPTA,countriesnegotiate,signtheagreement,and

thenbringithomefordomesticratification.Indemocracies,governmentsoftenrequire

(formalorinformal)legislativeratification.Inothercountries,ratificationmayinvolvethe

legislatureorthesupportofotherindividualswithintheregime.Inanycase,governments

havetosatisfyvetoplayersbeforetheagreementcanberatifiedandratificationisthefinal

stageintheprocessofformingaPTA.

Ourdependentvariable,PTARatificationij,isthelogoftheoddsthatstateiratifiesa

PTAinyeartwithstatej,whereweobserve1ifthisoccursand0otherwise.Ouranalysis

coverstheperiodfrom1951(forvariablesmeasuredinyeart‐1and1952forvariables

measuredinyeart)to2010(forvariablesmeasuredint‐1and2011forvariables

measuredint).Weaddressreciprocalagreements,whichinvolvepolicyadjustmentonthe

partofallmembers,andexcludearrangementswhereonestateunilaterallygrantsanother

countrypreferentialaccesstoitsmarket.Sinceweareinterestedintheformationof

preferentialagreements,theobservedvalueofPTARatificationijis1inyearswhenstates

initiallyratifyanewPTAorwheniorjjoinsaPTAtowhichtheotherstateisalreadya

party,butnotinsubsequentyearswhentheagreementisinforce.

Iftheexactyearofratificationcouldnotbedetermined,werelyonthedatethat

stateisignedthePTAwithstatej.Sincemostagreementsareratifiedrelativelysoonafter

theyareformedandsincewearemissingratificationdatesinlessthan30percentofthe

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casesofPTAformation,thisisareasonableapproach.Sincestatesiandjneednot—and,

indeed,oftendonot—ratifyatradeagreementinthesameyear,ourunitofanalysisisthe

annual“directeddyad.”Consequently,foreachdyadineachyear,thereisoneobservation

correspondingtostateiandasecondobservationcorrespondingtostatej.Forexample,in

thecaseoftheUnitedStates‐Mexicandyadin1985,weincludeoneobservationwherethe

U.S.isiandMexicoisj,andasecondobservationwhereMexicoisiandtheU.S.isj.Each

monadicvariable,isincludedinthismodelonlyonce,forthecountrylistedasiineach

particularobservation.Becausefocusingondirecteddyadsdoublesthenumberof

observationsinthesample,therebyproducingstandarderrorsthataretoosmall,we

clusterthestandarderrorsovertheundirecteddyad.

TheIndependentVariables

Ourprimaryindependentvariablesaretheregimetypeofeachnation‐stateand

fluctuationsinthebusinesscycle.First,Democracyiindicateswhetherstatei’spolitical

regimetypeisdemocraticornotinyeart.Tomeasureregimetype,werelyonawidely‐

usedindexconstructedbyGurr,Jaggers,andMoorethatrangesfrom1forthemost

autocraticcountriesto21forthemostdemocraticstates,aswellasdatadrawnfromthe

PolityProject(Gurr,Jaggers,andMoore,1989;JaggersandGurr1995;MarshallandJaggers

2009).4

4WeusedthePolityIVdata,generatedin2011.

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Inthefollowinganalysis,weusethreedifferentthresholdsfordemocracy:(1)a

scoreof20‐21ontheaforementionedindex,(2)ascoreof16‐21,and(3)ascoreof12‐21.

AlmostallOECDcountriesarecodedasdemocraticbasedonthefirstthreshold(the

exceptionsaretheCzechRepublic,Estonia,Mexico,SouthKoreaandincertainyears,

BelgiumandFrance).Sotooareanumberofsmallercountries.In2010,forexample,

CostaRica,Estonia,Lithuania,Mauritius,Mongolia,Taiwan,Trinidad,andUruguaywere

democraticbasedonthemostrestrictivedefinition.Usingthesecondthresholdadds

variouscountriestothedemocraticranks;dependingontheyearinquestion,these

countriesincludeArgentina,Brazil,Burundi,Georgia,India,Liberia,Nepal,Pakistan,South

Africa,Turkey,Ukraine,andalloftheOECDcountriesthatdidnotcrossthefirstthreshold.

Thethirdthresholdgeneratesamuchmoreheterogeneoussetofcountries—

includingcontemporaryAlgeria,Cambodia,Iraq,Nigeria,Russia,SriLanka,andThailand—

someofwhichfalloutsidetheboundsofwhatmostobserverswouldconsiderdemocratic.

OurargumentimpliesthatthetendencyfordemocraciestoenterPTAsduringhardtimes

shouldbemostpronouncedifcountrieshavethemostfullyformeddemocraticinstitutions

andleastpronouncedifcountrieshavelessdemocraticinstitutions.Bycomparingresults

acrossthesethreethresholds,wecanassessthisimplication.

Second,tomeasurethebusinesscycle,weincludeGDPi,thepercentagechangein

thegrossdomesticproduct(GDP)ofstateifromyeart‐1toyeart.5Wealsoincludethe

5GDPdataaretakenfromthePennWorldTables(Heston,Summers,andAten2011)andareexpressedinconstantU.S.dollars.

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interactionbetweenDemocracyiandGDPitoaddressourargumentthatdemocraciesare

especiallylikelytoestablishPTAsduringeconomicdownturns.Ourdatarevealthaton

averageittakescountriesabout349days(205daysisthemedian)toratifyan

internationaltradeagreementafterithasbeensigned.Sinceleadersusuallyhavesome

abilitytomanipulatethetimingofthedomesticratificationprocess,weassumethatthis

lessthanoneyearperiodalsocorrespondstothetimeoftheeconomicshocktheyare

experiencing.

WealsoincludeavarietyofvariablesthathavebeenlinkedtoPTAformationin

priorresearch,manyofwhichmightbeassociatedwithacountry’sregimetype,its

businesscycle,orboth.Tobegin,thereisamplereasontoexpectthatinterestgroups

influencethenegotiationandratificationoftradeagreements.Weaccountfortheireffect

byexaminingthenumberofvetoplayersinacountry.Theseactorshaveinstitutional

capacitytoaffectwhetheranexecutiveisabletopasstradelegislation.Thenumberofveto

playersaffectsthetransactioncoststhatthegovernmentbearswhenratifyingaPTA.

Thesecostsaregreaterincountriesmarkedbyalargenumberofvetoplayers,whichin

turnreducestheincentivesforleaderstotrytonegotiateandratifyPTAs.Consequently,

theoddsofastateenteringapreferentialarrangementarelikelytodeclineasthenumber

ofvetoplayersrises.6

6Onvetoplayers,seeHenisz(2000and2002)andTsebelis(2002).

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WethereforeincludeVetoPlayersi,whichindicatestheextentofconstitutionally

mandatedinstitutionsthatcanexercisevetopoweroverdecisionsinstateiaswellasthe

alignmentofactors’preferencesbetweenthoseinstitutionswithinthestate(Henisz2000

and2002).7Thismeasureiscontinuousandrangesfrom0to1.WhenVetoPlayersiequals

0,thereisacompleteabsenceofvetoplayersinstatesi.Highervaluesindicatethe

presenceofeffectivepoliticalinstitutionsthatcanbalancethepoweroftheexecutive.Note

thatDemocracyiandVetoPlayersiaremeasuredinyeartbecausepriorresearchindicates

thatthesevariablesshouldhaveacontemporaneouseffectonPTAratificationandthereis

littlereasontoworrythatourresultswouldbecompromisedbyanysimultaneitybias.

Afterall,itseemshighlyunlikelythatthedecisiontoformaPTA,muchlesstheratification

ofsuchanagreement,wouldinfluenceeitherastate’sregimetypeorthenumberof

domesticvetoplayers(MansfieldandMilner2012).Theremainingvariablesinourmodel

aremeasuredinyeart‐1.

ExistingPTAijindicateswhetherstatesiandjarealreadymembersofthesame

PTA(s).Participatinginatradeagreementislikelytoaffectastate’sproclivitytocreateor

joinanotherarrangementwiththesamepartner.Tradeijisthelogarithmofthetotalvalue

oftrade(inconstant2000USdollars)betweenstatesiandj.8Variousobserversarguethat

7Weusethemostrecentversionofthesedata,whichwereupdatedin2012.Heniszhasdevelopedtwomeasuresofvetopoints,onethatincludesthejudiciaryandonethatdoesnot.WeusethelattermeasuresincethereislittlereasontobelievethatthejudiciarywouldinfluencethedecisiontoenteraPTA.However,ourresultsarequitesimilarwhenweusethealternativemeasure.

8Weadd.001toallvaluesoftradesincesomedyadsconductnotradeinparticularyearsandthelogarithmofzeroisundefined.

20

increasingeconomicexchangecreatesincentivesfordomesticgroupsthatbenefitasa

resulttopressgovernmentstoenterPTAs,sincethesearrangementshelptoavertthe

possibilitythattraderelationswillbreakdowninthefuture(Nye1988).Moreover,

heightenedoverseascommercecanincreasethesusceptibilityoffirmstopredatory

behaviorbyforeigngovernments,promptingfirmstopressfortheestablishmentofPTAs

thatlimittheabilityofgovernmentstobehaveopportunistically(Yarbroughand

Yarbrough1992).9

Besideseconomicrelationsbetweencountries,economicconditionswithin

countriesarelikelytoinfluencePTAformation.Particularlyimportantinthisregardisa

state’seconomicsize.Largestatesmayhavelessincentivetoseektheexpandedmarket

accessaffordedbyPTAmembershipthantheirsmallercounterparts.Wethereforeanalyze

GDPi,thelogarithmofstatei’sgrossdomesticproduct(inconstant2000USdollars).

Inaddition,politicalrelationsbetweenstatesmayinfluencewhethertheyjointhe

samePTA,independentoftheirrespectivedomesticpoliticalstructures.Cooperationalso

dependsontheextentofdifferencesinpreferencesbetweencountries’leaders.Thefurther

apartarethesepreferences,thelesslikelyiscooperation.Toaccountforthese

preferences,weincludeanumberofvariablesthatmeasuretheforeignpolicydifferences

betweenstates.Militaryhostilitiesbetweenstatessignallargedifferencesinpreferences

betweencountriesandmaydiscourageeconomiccooperationandthustheirpropensityto

9NotethatweusetheInternationalMonetaryFund’sDirectionofTradeStatistics(variousyears)asthemainsourceforthetradedata.WedeflatethesedatausingtheUSGDPdeflator.

21

signPTAs.Similarly,political‐militarycooperationmaypromoteeconomiccooperation

(Mansfield1993;Gowa1994).Disputeijiscoded1ifstatesiandjareinvolvedinadispute,

0otherwise.Thoughmanystudiesofpoliticaldisputesrelyonthemilitarizedinterstate

disputes(MIDs)dataset(Jones,Bremer,andSinger1996;GhosnandPalmer2003),these

datadonotextendbeyond2000.Toanalyzethelongestpossibletimeframe,wetherefore

usethePRIOdataoninterstatearmedconflict,whichcoverstheperiodfrom1951to

2011.10Allyijequals1ifstatesiandjaremembersofapolitical‐militaryalliance,0

otherwise.WecodethisvariableusingtheATOPdata(Leedsetal.2002).11Further,since

previousresearchhasfoundthataformercolonialrelationshipbetweeniandjincreases

thelikelihoodthattheywillenterthesamePTA,weincludeFormerColonyij,whichequals1

ifstatesiandjhadacolonialrelationshipthatendedafterWorldWarII,0otherwise

(MansfieldandReinhardt2003;MansfieldandMilner2012).12

10Weusev4‐2008ofthedatafrom:http://www.prio.no/CSCW/Datasets/Armed‐Conflict/UCDP‐PRIO/.Theirdataincludes4typesofconflict:(1)extra‐systemicarmedconflictoccursbetweenastateandanon‐stategroupoutsideitsownterritory;(2)interstatearmedconflictoccursbetweentwoormorestates;(3)internalarmedconflictoccursbetweenthegovernmentofastateandoneormoreinternaloppositiongroup(s)withoutinterventionfromotherstates;and(4)internationalizedinternalarmedconflictoccursbetweenthegovernmentofastateandoneormoreinternaloppositiongroup(s)withinterventionfromotherstates(secondaryparties)ononeorbothsides.Type3conflictsweredropped.WekepttheotherthreetypesandexpandedthedatasothatallpossibledyadsbetweenthecountriesonsideAandthoseonsideBwerecreated.Datathatdidnothaveanindependentcountryasoneofthesideswerethendropped.ThesethenshouldbealldyadicconflictsintheUppsaladata.SeeGleditschetal.(2002)andHarbometal.(2008).

11FortheATOPdata,weuseversion3.0,specificallytheatop3_0ddyr.dtafilewhichisthedirecteddyaddataset.Becausethedataonlygoto2003,datafor2004werefilledinwith2003data.SeeLeedsetal.(2002).

12DataonformercolonialrelationsaretakenfromKurian(1992).

22

GeographicproximityisanotherimportantinfluenceonPTAformation.Statesoften

enterPTAstoobtainpreferentialaccesstothemarketsoftheirkeytradepartners.These

partnerstendtobelocatednearby,sincecloserproximityreducestransportationcostsand

otherimpedimentstotrade.Weintroducetwovariablestocapturedistance.Contiguityijis

adummyvariablethatiscoded1ifstatesiandjshareacommonborderorareseparated

by150milesofwaterorless.Distanceijisthelogarithmofthecapital‐to‐capitaldistance

betweeniandj.Itisusefultoincludebothvariablessincesomestateshavedistantcapitals

(forexample,RussiaandChina)yetshareborders,whileotherstatesdonotshareborders

butareinrelativelycloseproximity(forexample,BeninandGhana).13

Inaddition,systemicconditionsarelikelytoaffecttheprospectsofPTAformation.

Sincethereisevidencethatdeclininghegemonycontributestotheproliferationof

preferentialarrangements,weincludeHegemony,theproportionofglobalGDPproduced

bythestatewiththelargestGDP(inoursample,theUSforeachyear).Thisvariable

thereforetakesonthesamevalueforeachcountryinyeart‐1.WefurtherincludePost‐

ColdWar,whichequals0from1950to1988and1thereafter,toaccountforthespikein

PTAsaftertheBerlinWall’scollapse.Wealsoexaminewhetherpowerdisparitiesinfluence

theestablishmentofpreferentialarrangementsbyincludingGDPRatioij,whichisthe

naturallogarithmoftheratioofthecountryGDPsforeachdyad.Incomputingthis

variable,thelargerGDPisalwaysinthenumerator;henceanegativesignonthecoefficient

13DataondistanceandcontiguityaretakenfromCEPII’sgravitydataset(Head,Mayer,andRies2010).

23

ofthisvariablewouldindicatethatagreaterdisparitybetweenthecountriesdecreasesthe

likelihoodofratification.

Becausevariousobservershavearguedthatthespreadoftradeagreementshas

beenmarkedbydiffusion,weaddthepercentofalldyadsinthesystemthatratifiedaPTA

inyeart‐1,%DyadsRatifyingPTA.Sinceagivencountry’sbusinesscycleuslikelytobe

affectedbytheglobalbusinesscycle,weincludeGlobalBusinessCycle,ameasuredrawn

fromtheOECD’sCompositeLeadingIndicatorsdata.Thisvariableiscreatedbyassessing

trendsinvariousaspectsofeconomicoutputtoidentifyupturnsordownturnsinthe

internationaleconomy.WerelyontheOECDcompositemeasurethatidentifiesannual

change(fromJanuarytoJanuary)inthebusinesscycle.BecausetheGeneralAgreementon

TariffsandTrade(GATT)andWTOrecognizeandattempttogoverntheestablishmentof

PTAs,membersoftheseglobalinstitutionsmayalsobedisproportionatelylikelytoenter

preferentialarrangements(MansfieldandReinhardt2003).Toaccountforthispossibility,

weintroduceGATTij,whichequals1ifstatesiandjarebothmembersoftheGATTineach

yearpriorto1995oriftheyarebothmembersoftheWTOinyearsfrom1995on,and0

otherwise.14

Initially,weestimatethemodelwithregionalfixedeffects,usingeightregional

categoriesidentifiedbytheWorldBank,sinceitiswidelyarguedthattheprevalenceof

PTAsvariesacrossregions.Wethenestimatethemodelwithcountryfixedeffectsforstate

14DataaretakenfromtheWTOwebsite:http://www.wto.org.

24

iandjtoaccountforanyunobservedheterogeneityacrosscountriesinPTAformation.15

Finally,ijisastochasticerrorterm.

DescriptivestatisticsforallofthesevariablesarepresentedinTable1.Thesample

inthefollowinganalysesiscomprisedofallpairsofstatesduringtheperiodfrom1951to

2011.Becausetheobservedvalueofthedependentvariableisdichotomous,weuse

logisticregressiontoestimatethemodel.Testsofstatisticalsignificancearebasedon

robuststandarderrorsclusteredonthedyadtoaddressanypotentialproblemswith

heteroskedasticityorthedirecteddyadresearchdesign.Toaccountfortemporal

dependenceintheformationofPTAs,weincludeasplinefunctionofthenumberofyears

thathaveelapsed(asoft)sinceeachdyadlastformedaPTAwithknotsatyears1,4and7,

assuggestedbyBeck,Katz,andTucker(1998).Inthefollowingtable,however,the

estimatesofthisfunctionareomittedtoconservespace.

Results

InTable2,wereporttheestimatesofourmodel.Thefirsttwocolumnsshowour

resultswhenDemocracyiiscoded1forstatesthatscore20or21onthePolityregimetype

15Werelyonfixedeffectsforcountriesratherthandyadsbecausealmost85percentofthedyadsinoursampledonotformaPTAduringtheperiodweanalyzeandaredroppedfromthesamplewhenthemodelisestimatedwithdyad‐specificfixedeffects.Thereisnoreasontoexpectthatthesmallsetofcountry‐pairsusedtoestimatethemodelwithdyad‐specificfixedeffectsarerepresentativeofallcountry‐pairs.Consequently,thatestimationtechniquerisksgeneratingresultsthataremisleading,whichiswhyvariousobserverscounselagainstusingdyadicfixedeffectsinanalysesofdataassparseasours(BeckandKatz2001;King2001).Theuseofcountry‐specificfixedeffectsavoidsthisproblem.

25

index,thethirdandfourthcolumnsshowstheresultswhenitiscoded1forstatesthat

score16orgreater,andthefinaltwocolumnsshowourresultswhenthisvariableiscoded

1forstatesthatscore12orhigher.Theestimatedeffectsofregimetypeundervarious

macroeconomicconditionsdrawnfromourdataandbasedonthecountryfixedeffects

specificationareshowninFigures1‐3.Regardlessofhowstringentadefinitionof

democracythatweuse,democraciesaremuchmorelikelytoformPTAsduringdownturns

inthebusinesscyclethanduringperiodsofeconomicgrowth.Thelikelihoodofanon‐

democracyjoiningatradeagreement,incontrast,ismuchlesssensitivetothebusiness

cycle.

Equally,democraciesaremorelikelytoestablishPTAsthanothertypesofregimes,

butthistendencyismostpronouncedduringhardtimes.Finally,bothofthesetendencies

becomeincreasinglypronouncedasweimposeincreasinglystrictdefinitionsofdemocracy.

Amongstatessufferingan8percentreductioninGDP,forexample,democraciesaremore

thanfourtimesaslikelytoaccedetoaPTAasnon‐democraciesifwedefinedemocraciesas

statesthatscore20or21onthePolityindex,roughly55percentmorelikelyifwedefine

democraciesasstatesthatscore16orgreateronthisindex,andabout15percentmore

likelyifwedefinedemocraciesasstatesthatscore12orgreateronit,basedonthefixed

effectsspecification.

Asexpected,theoddsofratifyingaPTAalsoriseasthenumberofvetoplayersfalls.

Ineachmodel,theestimatedcoefficientofVetoPlayersiisnegativeandstatistically

significant.Tofurtheranalyzetheeffectsofthisvariable,wecomparethepredicted

26

probabilityofstateiformingaPTAwhenithasfewvetoplayers—whichwedefineasthe

10thpercentileinthedata—tothepredictedprobabilitywhenithasmanysuchplayers—

whichwedefineasthe90thpercentileinthedata,holdingconstanttheremainingvariables

inthemodel.BasedontheresultsinthesecondcolumnofTable2,astatewithfewVeto

Playersiisabout20percentmorelikelytoratifyaPTAthanonewithmoreVetoPlayersi.

Thisfigurevariessomedependingonhowdemocracyisdefined,buttheseresults

nonethelessreinforcethepointthatdomesticpoliticsplaysanimportantroleinshaping

thedecisiontoentertradeagreements.

Notsurprisingly,however,variouseconomicandinternationalfactorsarealso

importantinthisregard.StatesthattradeextensivelytendtoformPTAs;ineachcase,the

estimatedcoefficientofTradeijispositiveandstatisticallysignificant.Increasingthemean

ofTradeijbyonestandarddeviationincreasesthepredictedprobabilityofratificationby

over15percent,holdingconstanttheremainingvariablesinthemodel.Further,basedon

thecountryfixedeffectsspecification,thereisevidencethatlargercountriesarelesslikely

toenterPTAsthantheirsmallercounterpartssincetheestimatedcoefficientsofGDPiare

negativeandsignificant.

Turningtothesystemicvariables,thereisevidenceofthediffusionofPTAsandthat

theoddsofratifyingsuchanarrangementroseintheColdWar’saftermath.Theestimated

coefficientofPost‐ColdWarispositiveandstatisticallysignificantineachinstance.Sotoo

isthecoefficientof%DyadsRatifyingPTA,whichindicatesthatPTAformationtendsto

27

clusterovertime.Statesmaybeeitherstrategicallyconditioningtheirbehavioronwhat

theircounterpartsdoorsimplyfollowingtheherd.

PTAsarealsoespeciallylikelytoformasahegemonicpowerrises.Theestimated

coefficientsofHegemonyinTable2arepositiveandstatisticallysignificant,indicatingthat

theoddsofratifyingapreferentialarrangementriseastheportionoftheworld’soutput

accountedforbytheleadingeconomyincreases.IncreasingthemeanvalueofHegemony

byonestandarddeviationyieldsalmosta30percentriseinthepredictedprobabilityof

ratification.Thisresultdiffersfromwhatwefoundinearlierresearch,perhapsbecause

thecurrentanalysiscoversalongertimeframe(MansfieldandMilner2012).

Inaddition,alliances,GATT/WTOmembership,andexistingPTAmembership

promotetheratificationofpreferentialarrangements.Asexpected,alliesaremorelikelyto

formpreferentialagreementsthanotherstates.However,political‐militarydisputeshave

littleeffectonPTAs;theestimatedcoefficientsofDisputeijarepositive,butarenot

statisticallysignificant.Thatmembersofthemultilateralregimearemorelikelytoform

PTAsthanotherstatesmightseemsurprisingatfirstblushsincethisinstitutionwas

intendedtocombatregionalismandbilateralism.However,theGATT’sArticleXXIVmade

specificprovisionsforsuchagreementsandPTAshaveflourishedamongmembersofthis

regime.Italsomightseemsurprisingthatcountriesthatalreadyparticipateinthesame

PTAaremorelikelytoformanotheronethanstatesthatarenotPTApartners.Butin

2005,forexample,1,126countrypairswerepartiestotwopreferentialagreements;415

pairstothreePTAs;82pairstofourPTAs;27dyadstofivePTAs;andthreepairstosix

28

PTAs.In1976,forinstance,PapuaNewGuineaandAustraliainkedabilateralagreement,

followedbybothcountriesjoiningtheSouthPacificRegionalTradeandEconomic

CooperationAgreement(SPARTECA)in1980.SingaporeandNewZealandsigneda

bilateralagreementin2000,afterwhichbothcountriesenteredtheTrans‐PacificStrategic

EconomicPartnershipAgreementin2005.In1997,theGreaterArabFreeTrade

Agreement(GAFTA)wassigned.Amongthememberswerethreecountries(Morocco,

Tunisia,andLibya)thatwerealsointheArabMaghribUnion,aswellassixmembers(Iraq,

Egypt,Syria,Yemen,Kuwait,andtheUnitedArabEmirates)thatwerealreadyjoinedunder

theCouncilofArabEconomicUnity(CAEU).

TheresultsalsoshowthatcontiguousstatesareunlikelytoformPTAs.In

combinationwiththeobservedeffectsofDistanceij,thissuggeststhatPTAsaremostlikely

toformbetweenstatesthatarenearbybutdonotshareaborder.Finally,whilemany

observersassumethatPTAsareformedbetweenalarge,richcountryandasmall,poor

one,ourresultsindicateotherwise.ThecoefficientestimateofGDPRatioijisnegativeand

statisticallysignificant,implyingthatgreaterimbalancesinnationalincomediscouragethe

ratificationofPTAs.Sincecountriesthatareequallypowerfulmaybebetterableto

concludeagreementsthatinvolvereciprocalconcessions,thisresultmaynotbethat

surprising.ButtheideathatmostsmallcountriesareforcedintoPTAswithlargerones

againsttheirwilldoesnotseemtobeborneout(Gruber2000).Finally,theestimated

coefficientofGlobalBusinessCycleisnegativeandstatisticallysignificant,indicatingthat

29

PTAsaremorelikelytoformduringeconomicdownturnsthanduringupswingsinthe

internationaleconomy.

Anumberofrobustnesschecksprovidefurthersupportforourclaims.Tobegin,we

replacethePolitymeasuresofdemocracywithanotherwell‐knownmeasuredevelopedby

Przeworskiandhiscolleagues(2000),andupdatedbyCheibub,Gandhi,andVreeland

(2010).Doingsohasnobearingonourfindings.NextwereplacethePennWorldTables

dataonGDPandthechangeinGDPwithdatadrawnfromtheWorldBank'sWorld

DevelopmentIndicators.AkeydifferencebetweenthesedatasetsisthattheWDIdatado

notstartuntil1960soalltheyearsbetween1950and1960aredroppedwiththis

variable.16Thischangedoesnotalterourmainresults.

Next,wewanttomakesurethatourresultsdonotsimplyreflecttheEuropean

Community/EuropeanUnion(EU),whichiscomprisedofdemocraciesthathaveformed

manytradeagreementssinceWorldWarII.WethereforestartedbydroppingallEuropean

countriesandthendropallpairsinwhicheithercountryisanEUmember.Neitherof

thesetestsyieldsanychangestoourcoreresults.Inaddition,ourresultsarevirtually

unchangedwhenweestimatethebasemodelusingarareeventslogitspecification,which

accountsforthefactthattheformationofaPTAisanuncommonoccurrence(Kingand

Zeng2001).Equally,althoughwethinkaoneyearlagismostappropriategiventhe

averagetimebetweenthesigningandratificationofatradeagreement,wealsomeasured

16ThecorrelationbetweentheWDIandthePennWorldTablesmeasureisonly0.80.ThismaybebecausethePennWorldTablesdataareinconstantinternationaldollarswhiletheWDIdataareinUSdollars.WepreferthePennWorldTablesdataduetothelongertemporalcoverage.

30

thepercentagechangeinGDPovertwo‐yearandfive‐yearintervals.Inbothcases,no

matterwhichdemocracycutoffweuse,ourfindingsstillhold.

Further,weanalyzethefirstPTAthatagivenpairofcountriesformsanddropany

subsequentagreementthattheyjoinfromthesample.Wealsoexplorewhetherourresults

changeifwecodethedependentvariablewhenPTAsaresignedbymember‐states,rather

thanwhentheyareratified.Noneofthesetestsyieldanychangestoourresults.

Finally,weaccountforseveraldomesticvariablesthatmightaffecttheobserved

influenceofregimetypeandthebusinesscycleonPTAformation.First,weincludevarious

measuresofthetimingofnationalelections,butfindnoevidencethattheyinfluenceeither

tradeagreementsortheeffectsofregimetypeandthebusinesscycleonsuchagreements.

Second,weexaminethepartisanorientationofgovernment.Interestingly,wefind

preliminaryevidencethatright‐winggovernmentsarelesslikelytojoinPTAsthanleft‐

winggovernments,andthatleftistgovernmentsindemocraticcountriesareespecially

likelytoenterPTAs.Nonetheless,introducingpartisanshipinourstatisticalmodeldoes

notaltertheeffectsofregimetypeandthebusinesscycle.Insum,ourresultsseemtobe

veryrobust.

Conclusions

Thereceivedwisdomisthateconomicdownturnspromoteprotectionism.Itis

thereforesurprisingthateconomichardtimessometimesleadpoliticalleaderstonegotiate

andratifytradeagreementsthatreducetradebarriersandpromotetradeamongthe

31

members.Wehavearguedthatdomesticpoliticalincentivesexistfordemocraticleaders

toestablishtradeagreementsduringhardeconomictimes.Ofcourse,domesticpoliticsis

notthesolefactorshapingPTAs;wehavefoundthatawidevarietyofeconomicand

internationalpoliticalvariablesalsoexertastronginfluenceoftheestablishmentofthese

agreements.ButthedomesticpoliticallogicofPTAshasbeenunderstudiedand

underappreciatedtodate,agapthatwehaveaimedtohelpfillinthisstudy.

PTAssignaltothepublicthatacountry’sleaderisnottotallycapturedby

protectionistspecialinterests.Hence,wheneconomictroublesarise,votersandpro‐trade

interestgroupsarelesslikelytoblametheleaderforthem.Establishingtradeagreements

thattendtoliberalizeandexpandoverseascommerceindicatestothepublicthatitsleader

isnotexploitativeorincompetentandthathardeconomictimesshouldbeattributedto

sourcesbeyondhisorhercontrol.Underthesecircumstances,leadershaveabetter

chanceofretainingofficeinthefaceofbadeconomictimes.Leadersrealizepoliticalgains

asaresultandthegeneralpublicalsobenefitsfromfreertrade.

Whereleadersfacegreaterpoliticalcompetition,theseconsiderationsare

particularlyimportant.Inmoredemocraticsettings,leadersaremoreconcernedwithhow

thepublicreactstobadeconomictimesandthusmorelikelytoenactpoliciesthatreassure

thepublic.Tradeagreementshelptoprovidesuchreassurance.Wethereforeexpectthat

leadersinmoredemocraticpoliticalenvironmentswillbemorelikelytonegotiateand

ratifyPTAsinbadtimesthanotherwise.

32

Autocratsareoftenlesssusceptibletothepoliticalconsequencesofeconomic

downturns(BuenodeMesquitaetal.2003).Hence,theyhavelessreasontopursuetrade

agreementsingeneralandduringbadtimes.Indeed,duringdipsinthebusinesscycle,they

mayavoidmakingagreementsbecausethedistributionaleffectsofdoingsomayharm

theirsupporters.Autocratsoftendependonthesupportofthemajorsectorsofthe

economyandmay,inturn,heavilyprotectthesesectorstogeneratepoliticalsupport.

Reducingtradebarriersinbadtimesmayunderminethissupportandthusjeopardize

theirholdonpower.Consistentwiththisobservation,wefindthatthebusinesscyclehas

relativelittlebearingonwhennon‐democraciesentertradeagreements.

Ourresearchsuggestssomegoodnews.PTAsdolesstopromotewelfarethan

unilateralormultilateraltradeliberalization;butwiththeWTOstrugglingtoadvance

multilateralliberalizationandthedifficultiesthatmanycountriesfaceunilaterally

liberalizingforeigncommerce,PTAsmaybethebestwaytokeeptheglobaltradingsystem

open.Moreover,itisgoodnewsthatdemocracyhasbeenspreadinggloballyandthat

democraticleadershavepoliticalreasonstoresistprotectionisminthefaceofbad

economictimes.

33

Table1.Descriptivestatistics.Obs. Mean Std.Dev. Min. Max.

PTARatification 1021530 0.009 0.094 0 1

Democracy≥20 1021530 0.259 0.438 0 1

Democracy≥16 1021530 0.472 0.499 0 1

Democracy≥12 1021530 0.533 0.499 0 1

ΔGDP 1021530 0.019 0.072 ‐0.656 1.191

ΔGDP×Democracy≥20 1021530 0.003 0.019 ‐0.199 0.291

ΔGDP×Democracy≥16 1021530 0.007 0.032 ‐0.310 0.296

ΔGDP×Democracy≥12 1021530 0.009 0.036 ‐0.337 0.315

VetoPlayers 1021530 0.227 0.218 0 0.720

ExistingPTA 1021530 0.106 0.308 0 1

Trade 1021530 ‐2.622 4.978 ‐6.908 13.016

GDP 1021530 17.319 2.041 12.161 23.298

Dispute 1021530 0.000 0.021 0 1

Ally 1021530 0.106 0.308 0 1

FormerColony 1021530 0.007 0.082 0 1

Contiguity 1021530 0.020 0.140 0 1

Distance 1021530 8.735 0.763 2.349 9.901

Hegemony 1021530 0.223 0.033 0.165 0.315

GDPRatio 1021530 2.436 1.794 0.000 11.077

Post‐ColdWar 1021530 0.598 0.490 0 1%DyadsRatifyingPTA 1021530 0.008 0.009 0 0.038

GlobalBusinessCycle 1021530 2.963 2.098 ‐4.529 7.579

GATT 1021530 0.471 0.499 0 1

34

Table2.EstimatedeffectsofregimetypeandthebusinesscycleonPTAratification,1951‐2011.

Democracy≥20 Democracy≥16 Democracy≥12RegionFEs CountryFEs RegionFEs CountryFEs RegionFEs CountryFEs

Democracy 0.545** 0.768** 0.305** 0.301** 0.129** ‐0.043(0.039) (0.056) (0.036) (0.047) (0.036) (0.048)

ΔGDP 0.232* 0.468** 0.274* 0.529** 0.346** 0.629**(0.115) (0.125) (0.125) (0.133) (0.126) (0.135)

Democracy×ΔGDP

‐4.774** ‐5.706** ‐1.883** ‐2.258** ‐1.820** ‐2.256**(0.532) (0.563) (0.306) (0.344) (0.275) (0.308)

VetoPlayers ‐0.521** ‐1.019** ‐0.619** ‐1.096** ‐0.384** ‐0.755**(0.071) (0.096) (0.085) (0.105) (0.085) (0.108)

ExistingPTA 0.133* ‐0.170** 0.133* ‐0.157** 0.130* ‐0.155**(0.054) (0.056) (0.054) (0.056) (0.054) (0.056)

Trade 0.034** 0.056** 0.035** 0.056** 0.034** 0.055**(0.003) (0.004) (0.003) (0.004) (0.003) (0.004)

GDP ‐0.010 ‐0.346** 0.003 ‐0.343** 0.000 ‐0.358**(0.011) (0.051) (0.011) (0.051) (0.011) (0.051)

Dispute 0.429 0.259 0.465 0.263 0.452 0.249(0.257) (0.264) (0.257) (0.265) (0.256) (0.265)

Ally 0.308** 0.848** 0.300** 0.842** 0.303** 0.845**(0.054) (0.052) (0.054) (0.052) (0.053) (0.052)

FormerColony ‐1.739** ‐1.959** ‐1.764** ‐1.959** ‐1.754** ‐1.956**(0.400) (0.436) (0.400) (0.435) (0.400) (0.435)

Contiguity ‐0.596** ‐0.734** ‐0.607** ‐0.733** ‐0.611** ‐0.732**(0.062) (0.061) (0.062) (0.061) (0.062) (0.061)

Distance ‐1.041** ‐1.116** ‐1.040** ‐1.115** ‐1.041** ‐1.114**(0.050) (0.044) (0.050) (0.043) (0.050) (0.043)

Hegemony 10.739** 8.848** 10.491** 8.352** 10.344** 7.995**(0.573) (0.822) (0.577) (0.829) (0.578) (0.831)

Post‐ColdWar 0.964** 1.134** 0.931** 1.100** 0.936** 1.138**(0.042) (0.046) (0.042) (0.046) (0.042) (0.046)

GDPRatio ‐0.174** ‐0.201** ‐0.173** ‐0.200** ‐0.173** ‐0.200**(0.009) (0.010) (0.009) (0.010) (0.009) (0.010)

%DyadsRatifyingPTA

44.733* 44.355** 44.139** 43.447** 44.319** 43.460**(1.111) (1.156) (1.115) (1.160) (1.112) (1.157)

GlobalBusinessCycle

‐0.113** ‐0.114** ‐0.112** ‐0.113** ‐0.112** ‐0.113**(0.006) (0.006) (0.006) (0.006) (0.006) (0.006)

35

GATT 0.182** 0.212** 0.179** 0.211** 0.193** 0.231**(0.029) (0.043) (0.029) (0.043) (0.029) (0.043)

Constant 0.933* 7.693** 0.840 8.251** 0.934* 8.807**

(0.456) (1.364) (0.456) (1.370) (0.455) (1.374)

N 1033945 1021530 1033945 1021530 1033945 1021530Clusters 29394 28598 29394 28598 29394 28598Log‐likelihood ‐42778.87 ‐40009.48 ‐42855.35 ‐40099.8 ‐42879.23 ‐40112.61Note:Entriesarelogisticregressionestimateswithrobuststandarderrorsclusteredbydyadinparentheses.Statisticalsignificanceisindicatedasfollows:**p<0.01;*p<0.05.Alltestsofsignificancearetwotailed.

36

Figure1.Predictedprobabilityofdemocraciesandnon‐democraciesratifyingaPTAundervariousdomesticeconomicconditions,1951‐2011,wheredemocracyisdefinedasaPolityscoreof20orgreater.

.00

2.0

04

.00

6.0

08

.01

.01

2P

rob

abili

ty o

f ra

tific

atio

n

-.08 -.06 -.04 -.02 0 .02 .04 .06 .08 .1Change in GDP

Polity<20 Polity>=20

PTA ratification probabilityPolity>=20

Note:Dashedlinesrepresent95%confidenceintervals.

37


.00

3.0

04

.00

5.0

06

.00

7P

rob

abili

ty o

f ra

tific

atio

n

-.08 -.06 -.04 -.02 0 .02 .04 .06 .08 .1Change in GDP




38


.00

3.0

035

.00

4.0

045

.00

5.0

055

Pro

bab

ility

of

ratif

ica

tion

-.08 -.06 -.04 -.02 0 .02 .04 .06 .08 .1Change in GDP




39

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