Does democracy cause trade policy liberalisation? Unpacking the black box of trade policy

Abstract

This paper contributes to the ongoing debate on the relationship between democracy and the liberalisation of international trade. A number of well-known works in international political economy have argued that democracy promotes trade liberalisation. However, these previous studies have taken trade policy as a whole and largely ignored the sub-dimensions of trade policy. In this paper, we disaggregate trade policy into tariff barrier, trade facilitation and trade openness and argue that democracy reduces trade barrier and promotes trade facilitation, but does not necessarily make the economy more dependent on trade. We test our hypotheses using a panel of about 150 developed and developing countries in the period from 1974 to 2014 and estimate four equations to obtain four different estimators for each dependent variable of interest. Specifically, we investigate the effects of democracy on tariff barrier, trade facilitation and trade openness using pooled OLS, fixed effect (FE), instrumental variable (IV) and system general method of moments (GMM) estimators. Overall, our hypotheses receive good empirical support. With other confounding factors being controlled for, democracy is negatively associated with tariff rate, positively associated with the Logistics Performance Index, but there is no evidence that democracy increases a country’s trade openness.