Economic Integration and Governance

Economic Integration and Governance: The Role of Preferential Trade Agreements

Traditional economic analyses implicitly assume that costs are technologically determined and thus the same regardless of the form of economic organization. In such a world, preferential trade agreements (PTAs) are a second-best policy. The theory presented here suggests that PTAs arise when international trade involves large and recurrent transaction-specific or non-salvageable investments that are subject to opportunism, particularly in the form of government policies. Organizational form then becomes a major determinant of costs; and a preferential trade agreement, by providing an organizational structure that can reduce opportunistic behavior, may produce benefits beyond those typically recognized.