Academic journal article Stanford Journal of International Law

Regime Type, Veto Points, and Preferential Trading Arrangements

Academic journal article Stanford Journal of International Law

Regime Type, Veto Points, and Preferential Trading Arrangements

Article excerpt

   I. WHAT ARE PREFERENTIAL TRADING ARRANGEMENTS?
  II. THE EFFECTS OF REGIME TYPE AND VETO POINTS ON PTA FORMATION
 III. EMPIRICAL TESTS OF THE HYPOTHESES
  IV. THE DEPENDENT VARIABLE: PTA RATIFICATION
   V. THE KEY INDEPENDENT VARIABLES: REGIME TYPE AND VETO POINTS
  VI. CONTROL VARIABLES
 VII. RESULTS OF THE EMPIRICAL ANALYSIS
VIII. ROBUSTNESS CHECKS
  IX. CONCLUSIONS

Preferential trading agreements (PTAs) are proliferating rapidly. Scores of these institutions have formed over the past half-century and almost every country currently participates in at least one. By 2006, according to the World Trade Organization (WTO), nearly 300 PTAs were in force, covering approximately half of the overseas trade conducted worldwide. (1) Why states have chosen to enter such arrangements and what bearing the spread of PTAs will have on international affairs are issues that have generated considerable controversy. Some observers fear that these arrangements have adverse economic consequences and have eroded the multilateral system that has guided international economic relations in the post-World War II era. Others argue that such institutions are stepping stones to greater multilateral openness and stability. This debate has stimulated a large body of literature on the economic and political implications of PTAs. Surprisingly little research, however, has analyzed the factors giving rise to these arrangements. The purpose of this article is to help fill that gap.

Although nearly every country now belongs to a PTA, some states have rushed to join many of these arrangements, whereas others have joined very few. Moreover, states have entered them at different points in time. What explains these variations? Some studies have emphasized that states enter PTAs to generate economic gains. Taken as a whole, however, there is considerable evidence that preferential arrangements have ambiguous welfare implications, shedding doubt on claims that countries join PTAs for economic reasons alone. (2)

Instead, we emphasize the domestic political benefits and costs for leaders contemplating membership in such an arrangement. First, leaders cannot credibly commit to ignore special interest pleading for trade protection. Consequently, voters may hold heads of state responsible for bad economic times even if these economic conditions were not caused by policies stemming from the demands of special interests. Leaders can help address this problem by entering a PTA. Since this problem is more severe in more competitive electoral systems, democratic chief executives are especially likely to join preferential arrangements. Second, we argue that leaders face transaction costs when making trade agreements. The domestic ratification process contributes heavily to the magnitude of these costs. As the number of "veto points" expands, domestic ratification of an international agreement becomes more difficult. These two different domestic political factors--the nature of the regime and the number of veto points--play a significant role in determining whether countries are willing and able to establish a PTA.

The results of our statistical tests furnish considerable support for these arguments. Based on an analysis of all PTAs formed since World War II, we find that more democratic states are more likely to establish PTAs than their less democratic counterparts. We also find that states are less likely to enter a trade agreement as the number of veto points increases.

I. WHAT ARE PREFERENTIAL TRADING ARRANGEMENTS?

PTAs are international agreements that aim to promote economic integration among member-states by improving and stabilizing the access that each member has to other participants' markets. There are five different types of PTAs. (3) First, some arrangements grant each participant preferential access to select segments of the other members' markets. Second, a free trade area (FTA) is marked by the elimination of trade barriers on many (if not all) products within the arrangement. …

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