Testing Conflicting Political Economy Theories? Full-Fledged versus Partial-Scope Regional Trade Agreements

34 Pages Posted: 10 Jun 2009

See all articles by Xuepeng Liu

Xuepeng Liu

Kennesaw State University - Department of Economics and Finance

Date Written: 2009

Abstract

The median voter approach to trade policies within a Heckscher-Ohlin framework predicts that trade policy is pro-labor; while the lobbying model based on the argument of the free rider problem predicts that trade policy is pro-capital. We test these conflicting political economy theories using data on regional trade agreements (RTAs). Due to the violation of the conditional independence assumption of RTAs, we apply a duration analysis rather than standard binary choice analysis to the RTA panel data. The results show that the prediction of the median-voter model is supported by the full-fledged free trade areas and customs unions (FTAs/CUs); while the prediction of the lobbying model is supported by the partial-scope preferential trade arrangements (PTAs) among developing countries. Our findings hold better for the country pairs with more different capital-labor ratios due to stronger distributional effects of RTAs. The support for the median voter model (lobbying model) is stronger when the two countries in a pair have left-oriented (right-oriented) governments. We also find stronger support for the median voter model for the subset of FTAs/CUs with service coverage and stronger support for the lobbying model for countries that place higher weight on political contribution.

Keywords: regional trade agreements, political economy, inequality, median voter model, lobbying model, duration analysis

JEL Classification: F15, F12

Suggested Citation

Liu, Xuepeng, Testing Conflicting Political Economy Theories? Full-Fledged versus Partial-Scope Regional Trade Agreements (2009). Available at SSRN: https://ssrn.com/abstract=1417528 or http://dx.doi.org/10.2139/ssrn.1417528

Xuepeng Liu (Contact Author)

Kennesaw State University - Department of Economics and Finance ( email )

United States

HOME PAGE: http://ksuweb.kennesaw.edu/~xliu6/

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