Political and economic determinants of free trade agreements

Purpose – Will a free trade agreement (FTA) between nations be politically viable? Under political lobbying, which incentives determine whether FTAs will be signed or not? Will FTAs steadily include more countries until we reach a worldwide free trade? The paper addresses these questions using a theoretical analysis model, with “protection for sale” model as the foundation. Design/methodology/approach – Firstly, the economic and political factors are investigated in the theoretical model. Then, the validity of results is tested by econometric analysis with a panel probit model. The data spans 25 key trade nations and covers the period of 2007, 2010 and 2013. Findings – First, the FTA will be endorsed only if the aggregate welfare under FTA, combing lobby contributions with social welfare of both pair nations, is higher than the counterpart without FTA. Otherwise, FTA is rejected. Second, the possibility of concluding a FTA has positive correlation with pair nations’ market sizes and the number of countries with which they have both previously concluded FTAs; the possibility has negative correlation with the distance between pair nations; if pair nations’ aggregate market sizes are large enough, the possibility has positive correlation with government’s sensitivity to social welfare, otherwise the correlation is negative. Third, although FTAs are characterized by the regionalism, they will contribute to multilateral free trade in the long run. Originality/value – Most researchers do not take the foreign lobbying into account in the manner or the detail that we do here when they study the determinants of FTAs. This paper shows the condition under which FTA is politically viable and incentives behind FTA.