SIER Working Paper Series

With regard to the third-country effects on bilateral incentives to sign new preferential trade agreements (PTAs), we develop a theory-based empirical approach that enables the assessment of how a country’s pre-existing PTAs affect her formation of a new PTA. Assessment of this effect is not trivial because a country’s pre-existing PTAs are also the pre-existing PTAs of her potential PTA partner’s partner, generating two counter-acting effects on the bilateral incentives to sign a new PTA. Our empirical analysis shows that a country’s pre-existing PTAs generate a positive effect on her incentive to sign a new PTA (i.e., Own PTA effect) but they generate a negative effect on her new partner’s incentive to sign a PTA (i.e., Partner’s PTA effect), as our theory predicts. The analysis also reveals that members of a CU are less likely to sign a new PTA than non-CU member countries as the Partner’s PTA effect is magnified by the CU’s joint negotiation requirement for a new PTA. Based on our n-country model of PTA proliferation, we conduct some calibration exercises that yield a varying degree of predictive power.

Keywords: Preferential Trade Agreements (PTAs); Pre-existing PTA effects; Proliferation of PTAs