Deep integration in the preferential trade agreements of Latin American countries and their global and regional partners (1982-2010)

• Main Author: Fuentes Sosa, Ninfa
• Published: London School of Economics and Political Science (University of London) 2014
• Subjects: 382; JL Political institutions (America except United States)
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.631564

Even though for more than 15 years, deep integration in trade agreements has been a recurring topic for politicians, scholars, international institutions, non-governmental organizations, industry leaders and journalists; there is no consensus yet on what deep integration is, and how it can be assessed. There are continuous news reports about the efforts of political leaders to pursue deep integration, and constant mentions about the design of new treaties and mechanisms to achieve deep integration between countries. In general, the proliferation of trade agreements after the Second World War is widely acknowledged in international trade literature and is a trend that will continue in the near future. Along this trend, Latin American governments have established numerous trade agreements with developing and developed partners in all regions of the world. In addition, since the 1950s and 1960s, these governments have acknowledged trade integration as a mean to promote economic development, which makes it increasingly important to understand the wide differences in the nature and levels of deep integration in their trade agreements. Nevertheless, as in other regions, little attention has been paid to explain differences in the content of trade agreements. This research extends an endogenous trade theory framework, first to analyse limited liberalization; and second, to study a group of countries with particular characteristics of opacity and discretional decision-making. The framework adapts a categorization of deep integration, derives preferences of economic actors from economic trade theories, and extends aspects of veto player theory and access point theory to exploit further their potential as an integrated structure of analysis. Then, these three aspects are studied through a collective action framework. Finally, the insight of previous studies that have highlighted the importance of systemic and international variables in the formation and design of trade agreements is considered. The importance of systemic and international theories and variables is not contested; the domestic-level explanations are developed as a complement to the insight that theories of international relations have provided. Two main arguments are put forward The first one is that the underlying depth structure of the trade agreements studied fits a categorization of vertical and horizontal margins, which are qualitatively different: vertical policy benefits are broader and more excludable than horizontal ones. To test this argument, first, the complete texts of all dyadic trade agreements signed by Latin American countries from 1982 to 2010 (256 dyadic agreements) were manually coded to form a database of depth of provisions (a total of 28, 160 data points). To minimize error measurement, entries were compared with those of partially overlapping databases (publicly available or accessed by request). In the following areas, a total of 110 provisions per agreement were coded and measured: antidumping measures and countervailing duties, bargaining position, competition, decision power, dispute settlement mechanisms, environment, global and bilateral safeguards, government procurement, institutional capacities, investment, labour, legitimacy, permanency, number of members, rules of origin, services, technical barriers to trade, type of agreement, and support bodies and mechanisms. To the best of my knowledge, this is the most comprehensive and detailed database of the depth of provisions of trade agreements established by Latin American countries. Next, provisions were analytically assigned to each margin. At the horizontal margin, agreements vary in the extent of the areas covered, the barriers removed in each area, the limits placed to governments when domestic industries face injury, and the coverage and strength of the support and enforcement mechanisms in each area. At the vertical margin, agreements vary in type, legitimacy required for entry into force and for amendments, permanency, and scope of institutional capabilities. Finally, principal components analysis confirmed that each variable aligns in the component to which was analytically assigned. As expected, the analysis highlighted the existence of two main components, which corresponded to the vertical and horizontal margins. The second main argument in this research is that two main domestic aspects contribute to explain the wide variations in nature and levels of depth of the trade agreements established by Latin American countries after 1982. First, changes in the structure of concentration of the export sectors of Latin American countries. Second, the degree of political decisiveness and level of access of societal demands determined by the institutional settings of these countries. After most of the countries abandoned the economic model based in the substitution of imports, in the 1980s, the structure of the export sectors of the countries changed. Two forces pulled in different directions: unilateral liberalization towards concentration and diversification towards deconcentration. On the one hand, agreements vary in the extent of barriers removed in diverse trade related regulatory activities, and in the inclusion of support and enforcement institutions and mechanisms. This research argues that these aspects have implications over the economic benefits that different types of exporters are able to appropriate, and therefore over their preferences over aspects of deep integration and over the intensities of said preferences. Resourceful exporters with scale economies and/or fragmented production increased their static and dynamic gains from trade through vertical and horizontal integration. In addition, this research argues that the different extents of the governments’ political decisiveness and access to societal demands have important implications over the lobbying costs of levels and forms of deep integration, and therefore over the possibilities of different types of exporters to shape trade agreements according to their preferences and priorities. Combining the veto players theory and the access points theory (extending the former to consider competition from rents from lobbying, and extending latter to include settings of imperfect competition), suggests that decreases in the costs of lobbying veto players increased the possibilities of resourceful exporters with increasing returns to scale and/or fragmented production to achieve vertical integration. However, decreases in the costs of lobbying access points without veto power reduced these types of exporters’ advantages of capturing said points, which reflected negatively in horizontal depth. In these cases, predictions about deep integration based on of veto player theory and on access point theory, became conditional on the concentration of the export sector. Cross-sectional regression analysis was performed to test these arguments. The main results and those of robustness tests tended to show direct and indirect support for the arguments put forward in this research.