The Political Economy of Preferential Trade Arrangements: An Empirical Investigation

In this paper, we develop a political economy model to study the decision of representative democracies to join a preferential trading arrangement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis suggests that income inequality and bilateral trade imbalances are important factors in determining the formation of PTAs, while it points out that differences in the production structure among prospective member countries is an important factor in determining whether a CU or an FTA will emerge in equilibrium. Our empirical analysis, covering a sample of 124 countries over the period 1950-2000, lends strong support for the predictions of the model.