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Determinants of Free Trade Agreements Based on Limited Dependent Variable Models: ECO countries and their major trading partners

Gholami, Mahdi | 2012

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 43683 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Abedini, Javad
  7. Abstract:
  8. Establishing an efficient free trade agreement (FTA) requires some conditions in both trading partners. The median voter approach insists on the direction of general interests (identified by the utility of a median voter) to explain how two countries may agree to sign an FTA. At the other side, lobbying approach emphasizes on the role of interest groups (groups with a large influence on the public decisions) in forming FTAs. Taking into account the theoretically based and empirically robust foundation of the median voter approach, we rely on it to investigate the major determinants of free trade agreements in the case of ECO countries besides all their main trade partners. The database constitutes of 27 countries over 21 years (1988-2008) and includes various economic, social, and political factors simultaneously. In particular, our model introduces the role of economies of scales, based on the new trade theory, as well as other economic determinants, specified by traditional trade theories. In the lack of data for the national degrees of economies of scale, we compute the series using a translog cost function separately specified in a seemingly unrelated regression system (SUR). The probabilities of FTAs are then obtained from estimating a binary model using appropriate estimators such as probit and logit models. The bootstrapping results confirm the robustness of the estimates to the choice of distribution function, as it may be vulnerable in the case of such estimators. We find that FTA formation is, in major, a function of the sum of partners’ GDPs (the total market size), the sum of economies of scale across them, the difference of trading countries in factor endowments, and geographical distance between them. Indeed, 1 percent increase in those variables (their logarithms) respectively influences the probability of forming FTA by 3.7, 0.125, -2.9, and 7.2 percent. In addition, the results show that the similarity of countries in political regime and culture would significantly increases their chance of forming a common FTA. In contrast, the effect of some other variables such as the difference of GDPs and the difference of economies of scale across countries is not found significant. In particular, the fitted values of the model suggest Azerbaijan (0.99), Turkmenistan (0.92), Kazakhstan (0.86), Uzbekistan (0.85) and Turkey (0.84) as the most suitable partners for Iran in a liberalizing its international trade
  9. Keywords:
  10. Gross Domestic Product ; Free Trade Agreement (FTA) ; Economies of Scale ; Capital-Labor Ratio ; Limited Dependent Variable Model

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