SOCIO-POLITICAL DETERMINANTS OF INTERDEPENDENT REGIONAL TRADE AGREEMENTS: AN EMPIRICAL APPLICATION

Abstract

Probability of forming regional trade agreements (RTAs) will be greater if two countries are closer in geographical distance. This paper extends the meaning of ‘closer’ by considering not only the geographical distance, but also the socio-political distance as well. This paper empirically analyzes whether a causal relation exists between the socio-political factors−the cultural affinity measured by common language, same religion, and a newly introduced composite index of cultural distance and political ties measured by the existence of a military alliance and the level of democracy–and the likelihood that RTAs will form. For such quantitative analysis, this paper applies the estimation techniques of a qualitative choice model (pooled Probit model with cluster-robust standard errors) to the panel data, which covers bilateral country-pairs among 66 countries between 1998 and 2009. In addition, the interdependence of the formation of RTA is also investigated by considering the third country effects. For a feasibility study, we estimate the probability of forming the proposed RTAs in the East Asian region as an empirical application. We find that the formation of RTAs has been strongly and significantly driven by the reduced cultural distance between members and influenced by the interdependence with third countries. Unlike the existing studies, however, the conventional socio-political determinants (religious similarity, military alliance, and democracy) do not significantly matter for the formation of interdependent RTAs. From the feasibility test for proposed RTAs in East Asia, we argue that building closer cultural linkages between countries in the region are prerequisite to realize the formation of the proposed RTAs such as the China-Japan (CJ), the Japan-Korea (JK), the China-Japan-Korea (CJK), the ASEAN[Formula: see text]3 (10 Association of SouthEast Asian Nations, China, Japan, and Korea), and the Regional Comprehensive Economic Partnership (RCEP).