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Political and Economic Determinants of Free Trade Agreements in the Presence of Foreign Lobbying

Gu, ZhenHua (2014): Political and Economic Determinants of Free Trade Agreements in the Presence of Foreign Lobbying.

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Abstract

Will a free trade agreements (FTAs) between nations be politically viable?Under political lobby what incentives determine whether FTAs will be signed or not? Will FTAs include steadily more countries until we reach worldwide free trade? The paper addresses these questions using a theoretical analysis model of free trade agreement under imperfect competition, with Grossman and Helpman’s “protection for sale” model as the foundation. The validity of theoretical 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. It is shown that: the FTA will be endorsed if and 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, the agreement is rejected. The possibility of concluding a FTA by a pair of nations has significant positive correlation with both of their market sizes and the number of countries with which they have both previously concluded FTAs; the possibility has significant negative correlation with the distance between pair nations; If both of the pair nations’ market sizes are enough large, the possibility has positive correlation with government’s sensitivity to social welfare; Otherwise, the correlation is negative. Although FTAs are characterized by the regionalism, they will contribute to multilateral free trade in the long run.

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