Economic Integration and Endogenous Trade Agreements: Analysing Global Trade Effects

Abstract

After the 1990s, global trade has seen a sudden proliferation of regional trade agreements (RTAs). Existing empirical literature argues about the differential impact of these trade agreements on high-income and lower-middle income countries’ trade. Further, economic and political arguments have developed to justify the proliferation of such trade negotiations. In this article, we have tried to build an argument taking economic and non-economic rationales of the formation of trade agreements as a complement to each other. Unlike the majority of existing literature in this field, our empirical analysis is an establishment of this debate which provides a platform to consider RTA formation to be an endogenous rather than exogeneous decision. Further, RTAs of varying nature are related differently to the unobservable which impede or facilitate trade. These unobservable also create endogeneity bias in the traditional estimation of RTAs’ impact on the trade flows of a country. In this study, we have attempted to investigate the endogeneity in the context of RTA engagements using the Heckman control function approach. My study ensures the endogeneity of RTAs with their positive and significant impact on trade flows. My results do not significantly differ from similar kinds of empirical studies available on international platforms. JEL Classification: F1, F12, F14