Are free trade areas good for multilateralism? Evidence from the European Free Trade Association

Abstract

Do free trade agreements (FTAs) help or hinder multilateral trade liberalization? This question, though much debated, remains unanswered because (1) there has been scant attention to the conditions under which FTAs have either effect, and (2) extant hypotheses have not been rigorously tested. In this article I identify conditions under which FTAs help and hinder broader trade liberalization: they do the former when members' intra- and extra-FTA comparative advantages are similar and the latter when the opposite is true. I test these hypotheses using trade, output, and tariff data from the European Free Trade Association. The trade data indicate that members with similar intra- and extra-FTA comparative advantages liberalized trade more rapidly than those with dissimilar comparative advantages. The output and tariff data suggest that these differences among members reflect hypothesized economic and political processes. My research implies that scholars should abandon universalistic arguments concerning the effects of regional arrangements and devote more attention to the conditions governing the relationship between regionalism and multilateralism.