4 Jul 2012
New Determinants for New Free Trade Agreements: Governance, Interdependence and Vertical Specialisation
NCCR-Trade Working Paper No 2012/32 by Javier Lopez Gonzalez
The ‘traditional’ determinants of Free Trade Agreements (FTAs) fall short in predicting the countries that are involved in the new wave of 21st Century Regionalism. Partners are now more distant and exhibit greater differences in their capital labour ratios than they did in the past and this suggests that important changes in the political economy dynamics that determine the internal support for further liberalisation may be taking place. This paper argues that the changing nature of trade, captured through the rise in vertical specialisation, is driving these changes and introducing new motives for countries to engage in new FTAs. The presence of adequate governance mechanisms, which are conducive to a more efficient allocation of economic activity, and the rise in international production linkages are shown to motivate the formation of these new agreements.