Political Trade Dependence and RTA Formation

Abstract:     
Why do developing countries negotiate North-South trade agreements, when they already enjoy preferential market access to developed country markets? Most developing countries benefit from the Generalized System of Preferences (GSP) and related schemes when they export to the US, the EU and other developed economies. And yet, many pursue fully reciprocal agreements that require major concessions to the developed partner. We argue that this is due to the nature of the GSP as a unilateral concession that can be (and often is) taken away. High dependence on such exports motivates developing countries to seek North-South RTAs. We develop a concept of “political trade dependence” and illustrate its effect with Latin American cases. We then test our hypothesis on a dataset of EU and US trade agreements with developing countries. We find robust statistical support for our hypothesis that high and rising levels of political trade dependence make the negotiation of a North-South RTA more likely.

Number of Pages in PDF File: 43

Keywords: preferential trade agreements, developing countries, generalized system of preferences (GSP)

JEL Classification: F13, F15, O19

working papers series