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The New Regionalism and Policy Interdependence

  • Leonardo Baccini and Andreas Dür

Abstract

Since 1990, the number of preferential trade agreements has increased rapidly. The argument in this article explains this phenomenon, known as the new regionalism, as a result of competition for market access; exporters facing trade diversion because of their exclusion from a preferential trade agreement concluded by foreign countries push their governments into signing an agreement with the country in which their exports are threatened. The argument is tested in a quantitative analysis of the proliferation of preferential trade agreements among 167 countries between 1990 and 2007. The finding that competition for market access is a major driving force of the new regionalism is a contribution to the literature on regionalism and to broader debates about global economic regulation.

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1 Mansfield, Edward D. and Milner, Helen V., ‘The New Wave of Regionalism’, International Organization, 53 (1999), 589627.

2 See also: Oye, Kenneth, Economic Discrimination and Political Exchange: World Political Economy in the 1930s and 1980s (Princeton, N.J.: Princeton University Press, 1992); Richard E. Baldwin, ‘A Domino Theory of Regionalism’, NBER Working Paper No. 4465, 1993; Mattli, Walter, The Logic of Regional Integration: Europe and Beyond (Cambridge: Cambridge University Press, 1999); Pahre, Robert, Politics and Trade Cooperation in the Nineteenth Century: The ‘Agreeable Customs’ of 1815–1914 (Cambridge: Cambridge University Press, 2008); Dür, Andreas, Protection for Exporters: Power and Discrimination in Transatlantic Trade Relations, 1930–2010 (Ithaca, N.J.: Cornell University Press, 2010).

3 Gleditsch, Kristian S. and Ward, Michael D., ‘War and Peace in Space and Time: The Role of Democratization’, International Studies Quarterly, 44 (2000), 129; Braun, Dietmar and Gilardi, Fabrizio, ‘Taking ‘Galton's Problem’ Seriously: Towards a Theory of Policy Diffusion’, Journal of Theoretical Politics, 18 (2006), 298322; Franzese, Robert J. and Hays, Jude C., ‘Spatial Analysis’, in Janet M. Box-Steffensmeier, Henry E. Brady and David Collier, eds, Oxford Handbook of Political Methodology (Oxford: Oxford University Press, 2008), pp. 570604.

4 Plümper, Thomas and Neumayer, Eric, ‘Model Specification in the Analysis of Spatial Dependence’, European Journal of Political Research, 49 (2010), 418442.

5 Elkins, Zachary, Guzman, Andrew T. and Simmons, Beth A., ‘Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000’, International Organization, 60 (2006), 811846.

6 Beck, Nathaniel, Skrede Gleditsch, Kristian and Beardsley, Kyle, ‘Space Is More than Geography: Using Spatial Econometrics in the Study of Political Economy’, International Studies Quarterly, 50 (2008), 2744.

7 We provide a detailed explanation of how we arrived at these numbers below.

8 As some countries, for example, states in the area of the former Soviet Union, enter the dataset later than 1990, the actual number of dyads in our database varies between 10,153 and 13,861.

9 See, for example, Oye, Economic Discrimination and Political Exchange; Baldwin, ‘A Domino Theory of Regionalism’; and Mattli, The Logic of Regional Integration.

10 For the concept of trade diversion, see Viner, Jacob, The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950). A more recent discussion of trade diversion and other economic consequences of the creation of a preferential trade agreement is provided by Panagariya, Arvind, ‘Preferential Trade Liberalization: The Traditional Theory and New Developments’, Journal of Economic Literature, 38 (2000), 287331.

11 Srinivasan, T. N. and Bhagwati, Jagdish, ‘Outward-Orientation and Development: Are Revisionists Right?’ in Lal Deepak and Richard H. Snape, eds, Trade Development and Political Economy: Essays in Honor of Anne O. Krueger (Houndmills, Hants.: Palgrave, 2001), pp. 326, at p. 14.

12 There is also the uncertainty of whether they will be able to convince their own government to pursue their preferences, but this uncertainty is shared by import-competitors.

13 Goldstein, Judith and Martin, Lisa, ‘Legalization, Trade Liberalization, and Domestic Politics: A Cautionary Note’, International Organization, 54 (2000), 603632, pp. 607–8.

14 For this bias, see, for example, Alt, James E., Frieden, Jeffry, Gilligan, Michael J., Rodrik, Dani and Rogowski, Ronald, ‘The Political Economy of International Trade: Enduring Puzzles and an Agenda for Inquiry’, Comparative Political Studies, 29 (1996), 689717, p. 711.

15 This effect does not depend on trade diversion exceeding trade creation, as the benefits from trade creation will accrue to a set of actors within the preferential trade agreement, and not to exporters in excluded countries.

16 The same expectation of mobilization against losses can be derived from prospect theory. See Kahneman, Daniel and Tversky, Amos, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, 47 (2004), 263291; and Fanis, Maria, ‘Collective Action Theory meets Prospect Theory: An Application to Coalition Building in Chile’, Political Psychology, 25 (2004), 363388. According to prospect theory, actors are more willing to engage in risky behaviour if they expect losses. Although in this article we cannot empirically test prospect theory against our uncertainty-based argument for lobbying against losses, we find the latter approach theoretically more appealing in the context of other actors (governments) that are assumed to act rationally.

17 Vernon, Raymond, ‘International Investment and International Trade in the Product Cycle’, Quarterly Journal of Economics, 80 (1966), 190207, p. 200.

18 Destler, I. M., American Trade Politics, 4th edn (Washington, D.C.: Institute for International Economics, 2005), p. 5.

19 Solis, Mireya, ‘Japan's Competitive FTA Strategy: Commercial Opportunity versus Political Rivalry’, in Mireya Solis, Barbara Stallings and Saori N. Kafada, Competitive Regionalism: FTA Diffusion in the Pacific Rim (Houndsmills, Hants.: Palgrave, 2009); Manger, Mark, Investing in Protection: The Politics of Preferential Trade Agreements Between North and South (Cambridge: Cambridge University Press, 2009).

20 In the case of Chile, the South Korea–Chile agreement (2003) also had a negative impact on Japanese exports, especially of automobiles.

21 See, for example, ‘Half of S. Korean firms concerned over China–Taiwan trade deal’, Yonhap News, 11 August 2010; Jens Kastner, ‘Taiwan challenge to Korea, Japan’, Asia Times Online, 22 July 2010.

22 This assumption is common to a large number of studies in the field of International Political Economy. See, for example, Milner, Helen V., Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton, N.J.: Princeton University Press, 1988); Gilligan, Michael J., Empowering Exporters: Reciprocity, Delegation and Collective Action in American Trade Policy (Ann Arbor: The University of Michigan Press, 1997); and Chase, Kerry A., Trading Blocks: States, Firms and Regions in the World Economy (Ann Arbor: The University of Michigan Press, 2005).

23 The Chile–United States example provided in the following section on operationalization further illustrates this idea.

24 Grossman, Gene M. and Helpman, Elhanan, ‘The Politics of Free Trade Agreements’, American Economic Review, 85 (1995), 667690, p. 680.

25 Michael Richardson, ‘Pacific leaders are urged push EC in GATT talks’, International Herald Tribune, 2 November 1993.

26 Hanson, Brian T., ‘What Happened to Fortress Europe? External Trade Policy Liberalization in the European Union’, International Organization, 52 (1998), 5585.

27 This option is not available if the existing agreement is a customs union, as is the case for the EU.

28 Stokes, Bruce, ‘Loud European Trade Rumblings’, National Journal, 29 October 1988, p. 2729.

29 Countervailing duties can also be imposed by, and against, countries that are not members of the WTO.

30 Among the few quantitative studies are Mansfield, Edward D., ‘The Proliferation of Preferential Trading Agreements’, Journal of Conflict Resolution, 42 (1998), 523543; Manger, Mark, ‘The Political Economy of Discrimination: Modelling the Spread of Preferential Trade Agreements’ (paper prepared for presentation at the inaugural meeting of the International Political Economy Society, 2006); Roland Rieder, ‘Playing Dominoes in Europe: An Empirical Analysis of the Domino Theory for the EU, 1962–2004’, HEI Working Paper No. 11/2006; and Egger, Peter and Larch, Mario, ‘Interdependent Trade Agreement Memberships: An Empirical Analysis’, Journal of International Economics, 76 (2008), 384399.

31 Rieder, ‘Playing Dominoes in Europe’, restricts the analysis to 25 developed countries; Manger, ‘The Political Economy of Discrimination’; and Egger and Larch, ‘Interdependent Trade Agreement Memberships’, rely on distance as a proxy for trade diversion.

32 These databases are available at http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx; http://www.dartmouth.edu/~tradedb/; and http://ptas.mcgill.ca/. We also relied on other sources, such as www.bilaterals.org, to get a full list of agreements signed more recently [all pages last accessed on 7 January 2010]. It should be noted that we coded countries joining the EU as signing up to all trade agreements that the EU forms part of at the time of accession. This is legally correct and appropriate in the context of our study; however, it biases results against our argument, as a country such as Hungary, which joined the EU in 2004, may have had little interest in an agreement with Mexico or Chile.

33 Egger and Larch, ‘Interdependent Trade Agreement Memberships’, p. 389, for example, only distinguish 127 agreements over a period of fifty (1955 to 2005) years, whereas we were able to identify 247 agreements for the period 1990 to 2007 alone.

34 Mansfield, Edward D., Milner, Helen V. and Rosendorff, B. Peter, ‘Why Democracies Cooperate More: Electoral Control and International Trade Agreements’, International Organization, 56 (2002), 477513, p. 494 (fn. 27), took the same approach of excluding ‘agreements strengthening or superseding an existing PTA’.

35 For the LAIA, see Mattli, The Logic of Regional Integration, p. 142, and Kaltenthaler, Karl and Mora, Frank O., ‘Explaining Latin American Economic Integration: The Case of Mercosur’, Review of International Political Economy, 9 (2002), 7297, pp. 72–3. For the ECCAS, see Musila, Jacob W., ‘The Intensity of Trade Creation and Trade Diversion in COMESA, ECCAS and ECOWAS: A Comparative Analysis’, Journal of African Economies, 14 (2005), 117141, p. 121.

36 Ward, Michael D. and Skrede Gleditsch, Kristian, Spatial Regression Models (Thousand Oaks, Calif.: Sage, 2008).

37 The five-year cut-off point is consistent with the operationalization chosen by Egger and Larch, ‘Interdependent Trade Agreement Memberships’. Below we assess the robustness of our findings to variation in the cut-off point.

38 Trade diversion also depends on the height of trade barriers in the countries participating in the preferential trade agreement. Preferential trade agreements should impose higher costs on exporters in third countries – and thus lead to a stronger mobilization of export interests – the larger the difference between the trade barriers faced by insiders and outsiders. As trade barriers are difficult to measure, we omit this variable in the present analysis.

39 For a detailed discussion of this case, see Andreas Dür, ‘EU Trade Policy as Protection for Exporters: The Agreements with Mexico and Chile’, Journal of Common Market Studies, 45 (2007), 833–55.

40 We used data from the World Bank's World Development Indicators database, which allows disaggregating exports by twelve sectors (agricultural raw materials, arms, communications equipment, food, fuel, high-technology goods, insurance and financial services, international tourism, ores and metals, other commercial services transport services and travel services). We then correlated the export mix of all countries, which allowed us to arrive at an index of export similarity. For a similar approach, see Elkins et al., ‘Competing for Capital’, p. 830. In robustness checks (not reported), we used related indices that capture similarity in both export composition and destination. For these indices, see Cao, Xun and Prakash, Aseem, ‘Trade Competition and Domestic Pollution: A Panel Study, 1980–2003’, International Organization 64 (2010), 481503; and Polillo, Simone and Guillén, Mauro F., ‘Globalization Pressures and the State: The Worldwide Spread of Central Bank Independence’, American Journal of Sociology, 110 (2005), 17641802. These measures are highly correlated with ours and lead to substantially the same results. These results are available from the corresponding author.

41 The spatial matrices have been calculated using the software MATLAB 7.0 using a programme designed by the authors for this purpose. Although weighting matrices are commonly row-normalized so that all entries sum to 1 (see Franzese and Hays, ‘Spatial Analysis’, p. 580), we do not standardize here for theoretical reasons since we are interested in the absolute pressure on a dyad, independent of the pressure on another dyad. See Plümper and Neumayer, ‘Model Specification in the Analysis of Spatial Dependence’, p. 16–20.

42 We use the natural logarithm of this variable as it is characterized by occasional large observations.

43 Haggard, Stephan, ‘The Political Economy of Regionalism in Asia and the Americas’, in Edward D. Mansfield and Helen V. Milner, eds, The Political Economy of Regionalism (New York: Columbia University Press, 1997), pp. 2049, at p. 40.

44 The exporter lobbying that our argument predicts for such a case either could have facilitated passage of fast-track legislation in the United States or could have allowed ratification of an agreement as an international treaty, similar to what happened in the case of the United States–Jordan agreement.

45 Franzese and Hays, ‘Spatial Analysis’, p. 572.

46 The literature on policy diffusion distinguishes between rational learning and emulation. See Simmons, Beth A., Garrett, Geoffrey and Dobbin, Frank, ‘Introduction: The International Diffusion of Liberalism’, International Organization, 60 (2006), 791810; Elkins et al., ‘Competing for Capital’, pp. 831–2. We do not follow this practice, as a clear measure of the ‘success’ of preferential trade agreements, which is necessary for an evaluation of the learning argument, is missing.

47 We modified the geographic distance spatial weights by using a Box–Cox transformation, and taking the square and the log of distance. In all these variations, the substantial results reported below remain unchanged. For this and the following alternative diffusion mechanisms, we use the smaller of the two directed values to represent the undirected dyad. We use the natural logarithm of the variables to deal with outliers.

48 Elkins et al., ‘Competing for Capital’, p. 831.

49 The classic statement is Waltz, Kenneth N., Theory of International Politics (New York: Random House, 1979).

50 Gowa, Joanne, Allies, Adversaries, International Trade (Princeton, N.J.: Princeton University Press, 1994).

51 Franzese and Hays, ‘Spatial Analysis’.

52 Univariate summary statistics and data sources for all of these variables are available in the Appendix.

53 Yarbrough, Beth V. and Yarbrough, Robert M., Cooperation and Governance in International Trade: The Strategic Organizational Approach (Princeton, N.J.: Princeton University Press, 1992).

54 Bhagwati, Jagdish N., ‘Regionalism and Multilateralism: An Overview’, in Jaime de Melo and Arvind Panagariya, eds, New Dimensions in Regional Integration (Cambridge: Cambridge University Press, 1993).

55 Baier, Scott L. and Bergstrand, Jeffrey H., ‘Economic Determinants of Free Trade Agreements’, Journal of International Economics, 64 (2004), 2963, p. 45.

56 Gerard Ruggie, John, ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’, International Organization, 36 (1982), 379415.

57 Mansfield et al., ‘Why Democracies Cooperate More’.

58 Freedom House, Freedom in the World (Washington, D.C.: Freedom House, 2007).

59 The results reported below do not change when using other data sources, such as the Polity IV score (Monty G. Marshall et al., ‘Political Regime Characteristics and Transitions, 1800–2007’).

60 Krugman, Paul, ‘The Move toward Free Trade Zones’, in Lawrence H. Summers, ed., Policy Implications of Trade and Currency Zones (Kansas City: Federal Reserve Bank, 1991), pp. 742. Baier and Bergstrand, ‘Economic Determinants of Free Trade Agreements’.

61 Mansfield, Edward D. and Reinhardt, Eric, ‘Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Agreements’, International Organization, 57 (2003), 829862.

62 For this approach, see Plümper and Neumayer, ‘Model Specification in the Analysis of Spatial Dependence’, p. 7.

63 Survival analysis is the appropriate approach because our data is right-censored. See also Beck, Nathaniel, ‘Time-Series–Cross-Section Methods’, in Janet M. Box-Steffensmeier, Henry E. Brady and David Collier, eds, Oxford Handbook of Political Methodology (Oxford: Oxford University Press, 2008), 475493. The study by Elkins et al., ‘Competing for Capital’ on the diffusion of bilateral investment agreements is also based on the Cox model. Darmofal, David, ‘Bayesian Spatial Survival Models for Political Event Processes’, American Journal of Political Science, 53 (2009), 241257, provides an extensive analysis of the use of survival models with spatial effects. A different approach is taken by Cao, Xun, ‘Networks as Channels of Policy Diffusion: Explaining Worldwide Changes in Capital Taxation, 1998–2006’, International Studies Quarterly, (2010), who uses network analysis. We estimated our models with Stata 11.

64 Golub, Jonathan, ‘Survival Analysis’, in Janet M. Box-Steffensmeier, Henry E. Brady and David Collier, eds, Oxford Handbook of Political Methodology (Oxford: Oxford University Press, 2008), pp. 530546, makes a strong case for the advantages of the Cox model as compared with parametric models such as Weibull and Gompertz.

65 As recommended by Ward and Gleditsch, Spatial Regression Models, we checked whether the inclusion of spatial lags is appropriate by calculating the Moran index, using the total number of agreements signed by each country. The result confirms that there is statistically significant spatial correlation among countries.

66 Beck, ‘Time-Series–Cross-Section Methods’, p. 486.

67 Mansfield et al., ‘Why Democracies Cooperate More’.

68 In fact, when distance is excluded from the model, contiguity is positive and highly statistically significant.

69 Mansfield and Reinhardt, ‘Multilateral Determinants of Regionalism’.

70 These graphs are drawn and the following calculations are carried out after rescaling the distance, GDP and GDP per capita variables so that they have a mean of 0.

71 We are grateful to a reviewer for suggesting this robustness check.

72 The results are available upon request from the corresponding author.

73 Mansfield, Edward D. and Reinhardt, Eric, ‘International Institutions and the Volatility of International Trade’, International Organization, 56 (2008), 621652, p. 649.

74 Manger, Investing in Protection.

* Department of Political Science, IMT, Lucca; and Department of Political Science and Sociology, University of Salzburg, respectively (email: ). The authors are grateful to Alex Baturo, Neal Beck, Ken Benoit, Adam Bonica, Alessandra Casella, Dirk De Bièvre, Kristian Gleditsch, Sandy Gordon, Alex Herzog, Giovanni Maggi, Mark Manger, Christian Martin, Gail McElroy, Massimo Morelli, Thomas Plümper, Stephanie Rickard, Peter Rosendorff, Thomas Sattler, Alastair Smith, David Stasavage, Robert Thomson and Robert Walker, as well as two of the Journal's anonymous referees for comments on earlier versions of this article, and to Xun Cao, Simone Polillo and Zachary Elkins for sharing data. An online appendix with replication data and script is available at http://journals.cambridge.org/action/displayJournal?jid=JPS.

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The New Regionalism and Policy Interdependence

  • Leonardo Baccini and Andreas Dür

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