Do Comprehensive Trade Agreements Generate More Trade? A Conjecture to Reconcile Alternative Theories

Abstract

This note is motivated by the contradictory conclusions reached concerning the amount of trade generated by trade agreements of varying comprehensiveness and depth when agreements are examined through different prisms: analysis of the text of agreements with a view to identifying liberalizing content; analysis of the text of agreements to establish breadth; and quantitative modelling analyses of trade creation. “Deep integration” or “deep and comprehensive” agreements have more chapters touching on more subjects. At the same time, critically examined from the perspective of imposition of requirements to change laws or practice, they often do very little. From a legal perspective, the addition of chapters brimming with non-binding commitments seems to add little to trade creation. Econometrically, additional chapters are, however, associated with a gain in trade. I argue that these observations can be squared if more comprehensive agreements are associated with deeper commitments in the core chapters. The additional chapters add little if anything to trade growth directly; however, the commitment to deeper liberalization on core matters leads the parties to embellish the agreements, resulting in chapter inflation. This is a form of commitment bias, resulting in econometric findings that agreements with longer texts induce more trade.

Keywords: trade agreements, trade creation, legal inflation, deep and comprehensive FTAs, DCFTAs

JEL Classification: F13, F14