Just Because It Looks Like Diffusion It Doesn't Have To Be: Estimating Trade Policy Interdependence when Spatial Weights are Endogenous

Trade policy making has frequently been cast as a process in which decisions over trade policy in one country affect decisions over trade policy in other countries. In contrast to existing accounts, this paper treats the degree of influence between countries as endogenous. Specifically, we use trade flows between countries as a spatial weight with which to determine the importance of trade policies abroad. Hence, foreign trade policy diffuses between countries along trade relations. Simultaneously, these trade flows between pairs of countries change with both partners’ trade policies. Country-pairs with more similar trade policies will trade more. Hence, we are confronted with endogenous spatial weights: Does openness lead to trade? Or, in contrast, do countries adjust their own trade policies towards the trade policies of their trading partners? We apply stochastic actor-oriented models (aka Siena) as a family of network based models that can handle such endogeneity. We show that taking into account endogeneity and interdependence will change the results in comparison to estimates from spatial regression models that treat such processes as exogenous. Substantially, we find no evidence for trade policy diffusion via trade but only increased trade between countries with similar trade policies.