Cultural Affinity, Political Ties, and Endogenous Regional Trade Agreements

Probability of forming regional trade agreements (RTAs) will be greater if two countries are closer in geographical distance. This paper extends the meaning of closer by considering not only the geographical distance, but also the socio-political distance as well. This paper empirically analyzes whether a causal relation exists between the socio-political factorsthe cultural affinity measured by cultural indices (common language, same religion, and a new composite index of power distance, individualism, masculinity, and uncertainty avoidance) and political ties measured by the existence of a military alliance and the level of democracyand the likelihood that RTAs will form. For such quantitative analysis, this paper applies the estimation techniques of a qualitative choice model (pooled probit model with cluster-robust standard errors) to the panel data, which covers bilateral country-pairs among 136 countries between 1998 and 2009. The interdependence of the formation of RTA is also investigated by considering the third country effects. In addition, we estimate the probability of forming the proposed RTAs in the Asia-Pacific region as an empirical application. We find that the interdependence of RTA formation has been strongly and significantly driven by the deepening of socio-political linkages between members and as well as with third countries. We also find that closer political and cultural linkages between countries in the Asia-Pacific region are necessary in order to realize the formation of the proposed regional RTAs.