NCPA - National Center for Policy Analysis

Can Free Trade Agreements Help Solidify Emerging Democracies?

July 1, 2015

Trade is once again a major topic of debate in the United States as Congress wraps up a turbulent negotiation over legislation that could pave the way for new free trade agreements like the Trans-Pacific Partnership. In the past, an argument to advocate for trade agreements has been that free trade can help democracy flourish.

Xuepeng Liu of  Kennesaw State University and Emanuel Ornelas of the London School of Economics argue that free trade agreements help sustain democracy because they close off economic rents that can be lucrative to the powerful.

  • When a country can set its own tariff rates, the government is able to provide an industry protectionist tariffs or expose it to harsh global competition.

  • Officials can use this to extract bribes from businesses, or enrich themselves by investing in sectors in which they enact high tariffs.

Free trade agreements (FTA) also reduce the cost of lowering tariffs to nonpartner nations because it shrinks domestic industries that might lobby against doing so. With less opportunities for graft, a coup becomes less appealing.

Reneging on an FTA can be economically and diplomatically costly. Even when authoritarian groups come to power, FTAs tend to persist, which means there are permanently lower opportunities for corruption in these countries.

  • Liu and Ornelas found that an FTA covering 20 percent of a country's trade reduces the chance of an autocratic takeover by 1.2 percent each subsequent year.

  • The study found that at-risk democracies are more likely to enter into free trade agreements than stable democracies.

However, a new FTA does not assure a democracy's security. The benefit of an FTA on democracy's survival is roughly comparable to neighboring countries becoming democratic. Nonetheless, liberalization is good news for democracy.

Source: "

Can Free Trade Agreements Help Solidify Emerging Democracies

?" American Economic Association.

 

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