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The Effects of Institutional Design: Preferential Trade Agreements and Trade Flows

Manfred Elsig
Universität Bern
Leonardo Baccini
The London School of Economics & Political Science
Andreas Dür
Universität Salzburg
Manfred Elsig
Universität Bern

Abstract

A growing literature studies the design of international institutions. Only recently, however, a few studies have started to research the effects of institutional design. This paper studies the allegedly most important outcome variable for international trade agreements: trade flow effects. The increase of trade between contracting parties is seen as the litmus test for this popular instrument of international economic governance. We argue that institutional design –meaning variation in depth, flexibility and enforcement across agreements – is a major determinant for the trade flow effects of trade agreements. Our empirical examination relies on the most comprehensive dataset on the design of international trade agreements (DESTA) that is currently available, which covers close to 600 trade agreements signed between 1945 and 2009. The empirical test takes into account commitments within the World Trade Organization, extra-dyadic trade effects and vertical market integration. Finally, we disaggregate the trade effects, looking at inter- and intra-industry trade and sectoral trade flows. The results show that the design of trade agreements indeed has a major impact on their effects.