Baccini, Leonardo and Duer, Andreas
Investment Discrimination and the Proliferation of Preferential Trade
The proliferation of bilateral and regional trade agreements has arguably been the main
change to the international trading system since the end of the Uruguay Round in the mid-
1990s. We argue that investment discrimination plays a major role in this development.
Preferential trade agreements can lead to investment discrimination because of tariff
differentials on intermediary products and as result of provisions that relax investment rules
for the parties to the agreement. Excluded countries are sensitive to the costs that this
investment discrimination imposes on domestic firms and react by signing a trade agreement
that aims at leveling the playing field. We test our argument using a spatial econometric
model and a newly compiled dataset that includes 166 countries and covers a period of 18
years (1990-2007). Our findings strongly support the argument that investment discrimination
is a major driver of the proliferation of trade agreements.
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