Clubbing in Trade Policies: How Much a Threat to Trade Liberalization?

Abstract: Preferential trade agreements (PTAs) have mushroomed over the last two decades, with recent plans across the Atlantic and the Pacific adding to the momentum. However, despite their popularity in numbers, PTAs have always been met with the concern that their proliferation might come at the expense of overall trade liberalization because of undermining multilateral governance. This paper starts from the fact that international treaties are notoriously difficult to enforce, and so is compliance with trade agreements. By focusing on the political economy of how cooperation in trade liberalization is ultimately sustained via the threat of retaliation as institutionalized within the World Trade Organization (WTO), the paper illuminates a novel and completely different channel between PTA membership and trade liberalization. Tapping new data on PTAs and trade disputes within the WTO and exploring their interaction with respect to trade freedom, we provide empirical evidence that PTA membership actually improves on the working of institutional arrangements that are supposed to ensure coop- eration in trade liberalization, thus effectively catering to more open trade.