The Impact of Democratization on the Formation of Trade

Although there is evidence that domestic politics matter for the formation of preferential trade agreements, the impact of large-scale changes in political institutions, especially in the direction of democratization, on economic integration has been given surprisingly short shrift in the previous literature. This study takes a first step toward developing such an explanation. It posits that, at least under certain conditions, the process of democratization constitutes an important factor in the formation of regional arrangements. Specifically, when compared to unilateral and multilateral trade liberalization, forming a regional integration arrangement involves lower political costs for decision-makers. Thus, if moving towards democratic regimes forces political leaders to implement trade liberalization, the decision to form a regional trade agreement is usually the easiest and the most feasible to execute. Moreover, in presence of cluster of democratization in a given historical period several neighbouring countries are likely to share the same interest in liberalizing trade, thereby easing the bargaining process, which generally represents the main obstacle to the formation of a regional integration arrangement. This paper quantitatively tests the previous hypothesis using an original dataset that covers twenty Latin America countries from 1991 to 2000. Empirical results support the argument.