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The ties that bind: Geopolitical motivations for economic integration

Julian Hinz ()

No 2085, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

Abstract: Economic determinants of economic integration agreements (EIAs) have received ample attention in the economic literature. Political motivations for such agreements have been mostly studied as functions of domestic politics or in the context of conflict. In this paper I suggest a different narrative. Economic integration could be used as an instrument of foreign policy, where political considerations influence the choice of contracting partners. I sketch a simple model that exhibits the proposed mechanism in which a big country chooses between alternatives for integration in terms of economic and political welfare gains, while the small country is indifferent between possible partners for integration. In the empirical part I use a novel dataset on political events to test the predictions of the model and find evidence for the hypothesis that there is more to economic integration than "just trade". Geopolitical considerations play a determining role in the choice of the contracting partner country and the depth of economic integration.

Keywords: trade agreements; geopolitics; gravity equation; event data (search for similar items in EconPapers)
JEL-codes: F13 F15 F51 F53 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-int and nep-pol
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