Preferential Trade Agreements

Question 1

Formation of Trade Agreements

Answer 1

Two main reasons
1. The role of trade costs
2. the role of firms in general

Question 2

Trade and Lobbying for NAFTA - Chase

Answer 2

• Looks at NAFTA, amount of intra firm trade and how much these firms are lobbying for NAFTA
• More intra firm trade —-> more lobbying for NAFTA

Dependent variables
1. Support for NAFTA
2. Tariff transition
Independent variables:
- Economies of scale and intra firm trade

Question 3

Why are PTAs proliferated? - Mattil

Answer 3

Why is there a demand for integration from firms?
- Positive externalities, and lowers transaction costs
- Also the domino theory is in effect

• Larger markets help firms achieve economies of scale
• Firms that accumulate special production advantages have strong incentive for expanding production abroad, particularly if pulled by location-specific advantages in host countries.
• There is uncertainty and a time-inconsistency problem
• This is more important for autocracies than democracies because the spectator effect keeps democracies more in check
• Signing PTAs leads to lower tarifs on good, so firms can get the lowest resource costs, and PTAs act as a safeguard against uncertainty

Question 4

Who creates PTAs?

Answer 4

Pairs of countries are more likely to form a PTA:
- The closer two countries are geographically, distance
- The larger and more similar in economic size two trading partners are (more trade creation)
- The greater the difference in capital-labour ratios between two trading partners (more trade creation)
- Ie. the gravity model

Question 5

PTAs as Governance

Answer 5

1. Ties the hands of governments
   -PTAs allow developed countries to take retaliatory action if a member country fails to comply with a specific policy.
2. Leads to a sunk cost
   - Negotiating a PTA is a long and costly process, so just the fact that a country was willing to form a PTA shows that they are serious about the policies and restrictions