What Determines BITs?

Bilateral investment treaties (BITs) have proliferated over the past 50 years such that the number of pairs of countries with BITs is roughly as large as the number of country-pairs that belong to bilateral or regional preferential trade agreements (PTAs). The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of BITs and of the likelihood of BITs between pairs of countries using a qualitative choice model, and in a manner consistent with explaining PTAs. We develop the econometric specification for explaining the two based upon a general equilibrium model of world trade and foreign direct investment with three factors, two products, and explicit natural as well as policy trade and investment costs among multiple countries in the presence of national and multinational firms. The empirical model for BITs and PTAs is bivariate in nature and supports a set of hypotheses drawn from the general equilibrium model. Using the preferred empirical model, we correctly predict approximately 85 (75) percent of all BITs (PTAs) correctly, relative to an unconditional probability of only 11 (16) percent.bilateral investment treaties, foreign direct investment, multinational firms, free trade agreements, international trade

Do free trade agreements actually increase members’ international trade?

For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable’s endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled.

The growth of bilateralism

One of the most notable international economic events over the past 20 years has been the proliferation of bilateral free trade agreements (FTAs). Bilateral agreements account for 80 percent of all agreements notified to the WTO, 94 percent of those signed or under negotiation, and currently 100 percent of those at the proposal stage. Some have argued that the growth of bilateralism is attributable to governments having pursued a policy of “competitive liberalization" - implementing bilateral FTAs to offset potential trade diversion caused by FTAs of “third-country-pairs" - but the growth of bilateralism can also be attributed potentially to “tariff complementarity" - the incentive for FTA members to reduce their external tariffs on nonmembers. Guided by new comparative statics from the numerical general equilibrium monopolistic competition model of FTA economic determinants in Baier and Bergstrand (2004), we augment their parsimonious logit (and probit) model of the economic determinants of bilateral FTAs to incorporate theory-motivated indexes to examine the influence of existing memberships on subsequent FTA formations. The model can predict correctly 90 percent of the bilateral FTAs within five years of their formation, while still predicting “No-FTA" correctly in 90 percent of the observations when no FTA exists, using a sample of over 350,000 observations for pairings of 146 countries from 1960-2005. Even imposing the higher correct prediction rate of “No-FTA" of 97 percent in Baier and Bergstrand (2004), the parsimonious model still predicts correctly 75 percent of these rare FTA events; only 3 percent of the observations reflect a country-pair having an FTA in any year. The results suggest that - while evidence supports that “competitive liberalization" is a force for bilateralism - the effect on the likelihood a pair of countries forming an FTA of the pair's own FTAs with other countries (i.e., tariff complementarity) is likely just as important as the effect of third-country-pairs' FTAs (i.e., competitive liberalization) for the growth of bilateralism

Government expenditures and equilibrium real exchange rates

Economists have long investigated theoretically and empirically the relationship between government spending and equilibrium real exchange rates. As Frenkel and Razin (1996) summarize for a small open economy, government expenditures (financed by lump-sum taxes) influence real exchange rates via a resource-withdrawal channel and a consumption-tilting channel. Recent theoretical and empirical studies, such as Froot and Rogoff (1991), Rogoff (1992), De Gregorio, Giovannini, and Krueger (1994), De Gregorio, Giovannini, and Wolf (1994), De Gregorio and Wolf (1994), and Chinn and Johnston (1996), have focused only upon the effects of government spending through the resource-withdrawal channel. Extending Frenkel and Razin (1996), this paper generates closed-form theoretical solutions for the relationships among the real exchange rate, relative per capita private consumption, relative per capita government consumption, and relative per capita tradables and nontradables production in a two-country general equilibrium model. Using relative price level, private and government per capita consumption, and relative productivity data from the Summers and Heston (1991) Penn World Tables and OECD (1 996) data for a sample of OECD countries relative to the United States, we estimate the model\u27 s structural equations. The results suggest that government expenditures influence equilibrium real exchange rates approximately equally via the resource-withdrawal and consumption-tilting channels. Moreover, the results imply that government spending and private consumption are complements in utility

Trade agreements and trade flows: Estimating the effect of free trade agreements on trade flows with an application to the European Union

This paper examines the proposed EU-GCC FTA, a free trade agreement (FTA) between the EU and the Gulf Cooperation Counil (GCC), which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The paper first takes a fresh look at the methodology generally applied to analysis of potential FTAs, and then uses its own enhanced methodology to analyse the proposed EU-GCC FTA.trade flows,free trade agreement,FTA,gulf cooperation council,GCC,Baier,Bergstrand,European Economy. Economic Papers

The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade.

A general equilibrium model of world trade with two differentiated-product industries and two factors is developed to illustrate how the gravity equation, including exporter and importer populations, as well as incomes, "fits in" with the Heckscher-Ohlin model of interindustry trade and the Helpman-Krugman-Markusen models of intraindustry trade. The study extends the microeconomic foundations for a generalized gravity equation in Bergstrand (1985) to incorporate relative factor-endowment differences and nonhomothetic tastes. Empirical estimates of this generalized gravity equation for single-digit Standard Industrial Trade Classification industry groups yield plausible inferences of their capital-labor intensities. Copyright 1989 by MIT Press.