Political Externalities of Free Trade Agreement

Abstract

How much do political incentives play a role in free trade agreements (FTAs)? While political economists focused much on the interaction between state and market, they have paid scant attention to analyzing the role of state's preference on trade strategies. I argue that when policy-makers face tough FTA negotiations, which often entail higher social costs, they tend to pay more attention on possible political externalities from trade policy. By utilizing the earlier literature on security externalities, I design a game-theoretic model that explains the role of political externalities on the leader's trade strategy. This leads to a conclusion that when policy-makers expect higher positive political externalities, they are more willing to cooperate in trade negotiations. The model effectively explains the recent FTA boom in Asia and the opportunistic strategies of the three major economies in East Asia--China, Japan, and South Korea.