Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172534
Authors: 
Facchini, Giovanni
Silva, Peri
Willmann, Gerald
Year of Publication: 
2017
Series/Report no.: 
Kiel Working Paper 2096
Abstract: 
In this paper, we develop a political economy model to study the decision of representative democracies to join a preferential trading agreement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis suggests that income inequality and bilateral trade imbalances are important factors in determining the formation of PTAs, while differences in production structure among prospective member countries determine whether a CU or an FTA will emerge in equilibrium. Using a sample of 136 countries over the period 1960-2005, our empirical analysis lends strong support to these predictions: Income inequality and trade imbalances both reduce the likelihood of PTA formation, while geographical specialization increases the conditional probability of an FTA (over a CU).
Subjects: 
Free Trade Areas
Customs Unions
Trade Imbalances
Income Inequality
JEL: 
F13
Document Type: 
Working Paper

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