Political and economic determinants of free trade agreements. In the presence of foreign lobbying

DOIhttps://doi.org/10.1108/JCEFTS-09-2014-0016
Pages110-124
Date27 May 2014
Publication Date27 May 2014
AuthorZhenHua Gu,Yao Shen
SubjectEconomics,International economics
Political and economic
determinants of free trade
agreements
In the presence of foreign lobbying
ZhenHua Gu and Yao Shen
School of Economics, ShangHai University, ShangHai, China
Abstract
Purpose – Will a free trade agreement (FTA) between nations be politically viable? Under political
lobbying, which incentives determine whether FTAs will be signed or not? Will FTAs steadily include
more countries until we reach a worldwide free trade? The paper addresses these questions using a
theoretical analysis model, with “protection for sale” model as the foundation.
Design/methodology/approach – Firstly, the economic and political factors are investigated in the
theoretical model. Then, the validity of results is tested by econometric analysis with a panel probit
model. The data spans 25 key trade nations and covers the period of 2007, 2010 and 2013.
Findings – First, the FTA will be endorsed only if the aggregate welfare under FTA, combing lobby
contributions with social welfare of both pair nations, is higher than the counterpart without FTA.
Otherwise, FTA is rejected. Second, the possibility of concluding a FTA has positive correlation with
pair nations’ market sizes and the number of countries with which they have both previously concluded
FTAs; the possibility has negative correlation with the distance between pair nations; if pair nations’
aggregate market sizes are large enough, the possibility has positive correlation with government’s
sensitivity to social welfare, otherwise the correlation is negative. Third, although FTAs are
characterized by the regionalism, they will contribute to multilateral free trade in the long run.
Originality/value – Most researchers do not take the foreign lobbying into account in the manner or
the detail that we do here when they study the determinants of FTAs. This paper shows the condition
under which FTA is politically viable and incentives behind FTA.
Keywords International trade pattern, Trade political economics, Free trade agreements,
Lobbying groups
Paper type Research paper
1. Introduction
Recently, regionalism has strengthened all around the world. For example, the USA has
concluded bilateral free trade agreements (FTAs) with Israel, Canada and Mexico and
will pursue talk with perhaps other Latin American countries about Free Trade Area of
Americas. Meanwhile, a lot of members of the Association for South East Asian Nations
have been calling for the formation of East Asian Free Trade Area. According to the
data published by regional trade agreements (RTAs) database of World Trade
Organization (WTO), RTAs have become increasingly prevalent since the early 1990s.
By the end of 2013, some 561 notications of RTAs had been received by the General
Agreement on Tariffs and Trade (GATT)/WTO. Among these, 323 were in force.
JEL classication – D72, F02, F13
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
JCEFTS
7,2
110
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 7 No. 2, 2014
pp. 110-124
© Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-09-2014-0016

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