Deep Trade Agreements and Domestic Institutions in the Americas

Abstract

Preferential trade agreements (PTAs) have spread rapidly around the world since the 1990s. In the Americas, the proliferation of trade agreements with countries from within and beyond the region have resulted in a “spaghetti bowl” of overlapping rules and regulations, some of which address behind-the-border issues such as investment, competition, labor, and environmental standards. Earlier research has linked trade agreements to increased foreign investment inflows. This article argues instead that the effects of PTAs on FDI depend on the domestic institutional capacities of member countries. Domestic institutions condition the benefits and effectiveness of PTAs by influencing governments’ external credibility as well as their ability to implement the agreements they sign. The empirical findings show that weak state capacity exacerbates the spaghetti-bowl effects of multiple, overlapping agreements. Moreover, it is not the quantity but the quality, and more specifically, the depth of trade agreements that matters for attracting FDI.