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Economic Determinants Of Free Trade Agreement

Gu, Z. and Shen, Y. (2014), “Political and economic determinants of free trade agreements: In presence of foreign lobbying,” Journal of Chinese Economic and Foreign Trade Studies, Vol. doi.org/10.1108/JCEFTS-09-2014-0016 Will free trade agreements between nations be politically viable? What are the incentives that determine, under the political lobby, whether or not to sign free trade agreements? Will free trade agreements include more and more countries until we reach global free trade? The paper addresses these issues using a theoretical model of analysis of an imperfectly competitive free trade agreement, with Grossman and Helpman`s “protection for sale” model being the basis. The validity of the theoretical results is tested by econometric analysis with a panel probit. The data cover 25 major trade countries and cover the period 2007, 2010 and 2013. It turns out that the free trade agreement will be approved if and only if, under the free trade agreement, social assistance under the free trade agreement, which involves digging into the lobbies with the social welfare of the two couple countries, is higher than the equivalent without a free trade agreement. Otherwise, the agreement will be rejected. The possibility of concluding a free trade agreement through a couple of nations has a significant positive correlation, both with their market size and with the number of countries with which both parties have previously entered into free trade agreements; the possibility of a significant negative correlation with the distance between couple nations; If the market sizes of both couples are large enough, the possibility has a positive correlation with the government`s sensitivity to social welfare; Otherwise, the correlation is negative. Although free trade agreements are characterized by regionalism, they will contribute to multilateral free trade in the long term. Bond E W, Syropoulos (1996) The Size of Trading Blocks: Market Power and World Welfare Effects. Journal of the International Economy, 40: 411-37 .

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