Hubs of Governance: Path Dependence and Higher-Order Effects of Preferential Trade Agreement Formation

Abstract

In this paper, we investigate the causes and consequences of institutional design choices in the liberalization of services trade and investment in preferential trade agreements (PTAs). We distinguish between a positive-list and a negative-list approach to services liberalization, and analyze PTAs signed by countries of the Asia-Pacific. We develop an information-based argument that explains why these different types induce path dependence in subsequent choices, and derive hypotheses that capture the “history” effect of choosing either institutional model. In doing so, we examine whether particular “modes of governance” diffuse through the growing network of trade agreements through the adoption of rules by third parties in their own PTAs. The empirical analysis tests these hypotheses using simulation-based dynamic network analysis methods. We find evidence of strong path dependence in the choice of liberalization approach, affecting the evolution of PTA networks in the Asia-Pacific and the diffusion of services liberalization in general. Such path dependence has long-term consequences for the institutional features of the international trade regime.