Do democratic FTAs foster trade flows?

Jean-Marc Siroën, professor of international economics at the University Paris-Dauphine

Increasingly, preferential trade agreements involve deep rather than shallow integration. As a result, they may include clauses concerning the harmonization of regulations and standards. Moreover, a democratic commitment is sometimes a prerequisite to membership. Violations of democratic principles may serve as a motive to exclude countries from the free trade or custom union area. In order to join the European Union, a future member must be a stable democracy that respects human rights, the rule of law and the protection of minorities. Moreover, EU agreements with non-members also include democratic conditions and we also find such provisions in the EFTA agreements, Andean community, CEFTA, Mercosur, and NAFTA. Such clauses give rise to the fundamental ambiguity of the objectives of the preferential trade agreements. Do they aim to increase trade and improve well-being in the area or should they be regarded as instruments of foreign policy to serve the goal of regional political stabilization?

At first glance, the inclusion of a democratic provision in PTAs appears to point to geopolitical motives, although with few historical exceptions the most democratic countries are also more open to trade. Political stabilization was clearly the main objective of the European Union during 1950s and it was also the case during 1980s with Mediterranean countries and during 1990s with EU’s enlargement to ex-socialist Eastern European countries. But we might find similar motivations for NAFTA or Mercosur. Anchoring their institutions to an international agreement, these countries have consolidated their recent and fragile democracies. Both objectives might be compatible: it would be costly to denounce a welfare-improving agreement by returning to dictatorship or violations of human rights. Economic success then contributes to the consolidation of political stability.

However, if democracy leads to openness, a democratic country should then be open vis-à-vis all countries and not only with the other members of the same agreement. The inclusion of democratic clauses should therefore be “trade-creating” and attenuate the “trade-diverting” effect of PTAs.

Moreover, democratic commitment might also be viewed as a pre-condition to foster a “deep integration” process: only democracies would be able to drive the harmonization process of rules and standards. If democratic commitments imply deeper integration, we can expect that such agreements will have a bigger impact on trade inside the area. It is exactly what I tried to verify few years ago, with Clotilde Granger and Cindy Duc.

The first step was to examine all agreements notified to the WTO for classification in one of two categories: “democratic” or “non-democratic”. Our criteria were simple: a PTA will be considered democratic if it contains a reference to respect of democratic principles or a reference to the United Nation Charter (with an explicit provision to respect democratic principles). We have also restricted the category, “democratic”, to agreements containing an actionable sanction in case of violation. To find evidence of its trade effect, we used a gravity model where bilateral trade is explained by variables including the size (GDP), the distance, the existence of a common border, and WTO membership. We then introduced the variable which has to be explored: common membership in a democratic (non-democratic) preferential trade agreement.  

Although democratic countries might trade more than autocratic countries, our evidence showed that the inclusion of democratic clauses inside PTAs did not foster bilateral trade between the partners involved in the agreement. However, the relation was strongly positive for South-South trade especially for the most binding agreements, those providing for sanctions.

We can put forward a number of hypotheses to explain this result. Maybe, democracy has no robust effect on trade. In spite of our own evidence, the variables representing democracy might be correlated with a lot of other effects and, particularly, the level of development. We consider the main explanation to be that democratic provisions in PTAs might also be ineffective in liberalizing the political system. Many democratic agreements already involve developed countries having solid and well-established democracies and they have no reasons to improve trade through an institutional channel. It might be the reason why democratic provisions are more trade-creating in South-South agreements. A “light” democratic provision, without sanctions or counterparts, might fail to improve political regimes in autocratic countries.

However, the fragility of these empirical results does not mean that democratic provisions are useless. First, our conclusions only concern the intra-PTA trade.  Democratic provisions might create trade with the rest of the world because democratic institutions are a public good which is available to all countries, even outside the free trade area. Second, the absence of a common result for all agreements does not imply the failure of such clauses in some cases, which have to be specifically studied (EU, NAFTA). Finally, they may result in political stability and democracy, which are important components of human well-being and are therefore intrinsically valuable.

Jean-Marc Siroën is professor of international economics at the University Paris-Dauphine. He manages the Center of research Development, Institutions and globalization (DIAL) specialized in development and international economics. He is a specialist of international economic relations: trade policies in relation with institutions, WTO, labour standards.

> Guide to downloading files