BUS613: Advanced International Business

The present US government's announcement to revise the country's trade policy and negotiate "new and better deals" through BTAs has reignited the debate on the effects of such agreements and the underlying interests and strategies. Especially in the last years, BTAs have become an increasingly important and frequently used policy instrument to establish and intensify close trade relationships. In these agreements, countries grant each other trade privileges in terms of concessions on trade barriers, which include reductions of tariffs and quotas as well as easing of market access and of competition provisions. Theory suggests that the dismantling of trade barriers increases trade between the involved economies, which stimulates economic growth in the contracting countries. Previous empirical studies - mainly employing the so-called gravity models - largely confirm a positive effect of BTAs on trade. Yet, they also report that this might come at the cost of shifting production away from more efficient suppliers in other countries. Thus, BTAs can enhance some trading relationships and at the same time weaken others that are not directly covered by the agreement. Accordingly, BTAs can change the structure of the international trade network formed by input-output linkages between national economic sectors. Effectiveness of BTAs in enhancing trade among the contracting partners has been shown to depend on the affected countries' specific characteristics. In this context, geographic proximity, common language and/or cultural background, or a similar GDP have been suggested to be beneficial in increasing trade gains.

Importantly, the effectiveness of BTAs is also determined by the scope and extent of commitments agreed upon. BTAs are very diverse in content and design, reflecting that they might have been negotiated to serve other, strategic (and possibly non-economic) purposes as well, e.g., underpinning politically motivated partnerships between countries, increasing bargaining power in trade negotiations with third countries or fostering liberal economic policy reforms at the domestic level. Identifying and assessing the relative importance of the various possible objectives that might drive the negotiations proves difficult and is often a matter of interpretation of the final agreement. In this context, two of the most active players in global trade have been suggested to pursue markedly different interests in establishing BTAs: While past US policy probably had a particular focus on strengthening strategic alliances and rewarding their agreement partners for domestic economic reforms, China is often assumed to be particularly interested in gaining economic and, indirectly, political influence in the Asia-Pacific region by tying close economic dependencies.

In this study, we investigate the effectiveness of BTAs by assessing their impact on the trade flows between the economic sectors of each pair of contracting countries. To this end, we perceive all trade relationships as an international trade network (ITN), in which the sectors (nodes) are linked by their trade volumes. Network theory applied to trade economics has gained traction in recent years as it allows incorporating topological properties into the analysis. Noteworthy examples include studies on the formation and structure of economic dependencies, the resilience of the trade system to an outage of an industry or production facility, and the growth relevant dissemination of knowledge and technology. In contrast to gravity models often used for related analyses we can thus take higher orders of mutual economic interdependences into account. In the context of the present work, such higher-order dependencies reflect that BTAs might also affect the demand and supply of sectors indirectly linked with the exporting and importing sectors. The existence of these indirect effects have recently been disclosed by Sopranzetti S., who demonstrates that countries that are more connected to trade agreement blocs benefit by exporting more than those that are more isolated. Taking into account all direct and indirect input-output linkages within and across two respective countries, we introduce a quantitative framework for measuring the trade interconnectedness (TI) between two countries in the ITN. Accounting for all direct and indirect dependencies thus improves on the recently suggested Supply Propagation Connectivity (SPC) measure of Wenz and Levermann which is limited to measure direct dependencies only. Furthermore, we assess the impact of BTAs by evaluating the time evolution of the TI, considering both the trend and changes in the magnitude of the TI after the implementation date of a trade agreement. These methods, along with the description of the utilized data for this study are presented in section 2 of this paper. We analyze the effect of BTAs in general by drawing upon the 107 agreements that took effect between 1995 and 2008 in section 3. Specifically, we compare the results for the BTAs formed by the US and China and thereby provide quantitative empirical evidence for the suggested strategic differences in negotiating BTAs. A sensitivity study of our results with further detailed discussions on the effect of certain parameters of our analysis is presented in section 4, before this paper concludes with a discussion in section 5.