Econometric Approaches to Strategic Interactions in Trade Agreements

Abstract

Strategic interactions change the outcome and the duration of a trade agreement, but it is hard to estimate their effects. First, countries chose their partners in Free Trade Agreement (FTA) based on other countries’ choices. But accounting for such strategic interactions leads to multiple equilibria where multiple outcomes are possible. Using a moment inequality approach, my model shows that allies, such as the US and Japan, avoid competing for the same FTA partners, whereas traditional rivals, such as China and the US, form strategic FTAs with common partners. My estimate shows, for instance, that China’s having an FTA with a particular country increases the probability of the US having an FTA with that country by 27 percentage points. Second, strategic interactions also affect the duration of tariff negotiations. Here, I use network statistics such as centrality and distance to measure the effect of strategic interactions. Examples from the first three rounds of the General Agreement on Tariffs and Trade (GATT) show that central pairs of countries need to settle their negotiation before any other pair, which creates a delay in multilateral tariff bargaining.