The Political Economy of Preferential Trade Agreements: An Empirical Investigation

Abstract

Abstract We develop a political economy model to study the decision of representative democracies to join a preferential trading agreement, distinguishing between free trade areas and customs unions. Our theoretical analysis shows that bilateral trade imbalances and income inequality are important factors determining the formation of preferential trading agreements, whereas the patterns of geographic specialisation explain whether a customs union or a free trade area will emerge. Our empirical analysis—using a comprehensive panel dataset spanning 187 countries over the period 1960–2015—provides strong support for these predictions.