Regionalism and governance

Most of the empirical literature on regionalism focuses on trade creation and trade diversion, that is, on how much trade has increased or decreased after signing a trade agreement. Generally, estimates from traditional gains are rather modest. However the value of trade agreements goes beyond trade creating and trade diverting effects. For example, trade agreements can generate political gains associated with problems of credibility, signalling and insurance, which may have significant economic value. We aim at evaluating the importance of one of those political gains, namely, potential reduction in the volatility of agricultural trade-policy distortions and  determine whether location affects the magnitude of the estimated effect.  To do so, we use a new panel database compiled as part of the World Bank’s Agricultural Distortions research project which has recently been made available to the research community. Our empirical approach is a variant of the so-called ‘treatment effects’, where the treatment is the participation of countries in regional agreements. We devote considerable attention to the endogeneity of the treatment, which is not assigned randomly across countries. Governments do indeed sign trade agreements for reasons that may affect the quality of their trade policy. Quantification of those political gains are of particular interest to trade negotiators who have trouble finding incentives to conclude the current round of multilateral trade negotiations in the WTO.