A Preliminary Analysis of Competition for Trade Liberalization between the EC/EU and EFTA
Competition for trade liberalization is best explained by the concept of “competitive liberalization”. The concept is used to analyze whether the EC/EU’s trade liberalization has affected the decision of the European Free Trade Association (EFTA) to sign free trade agreements (FTA) with third countries. In order for “competitive liberalization” to be initiated and imitated, we suggest that it is critical for decision-makers to attribute their countries’ lack of competitiveness to the liberalization measures of competitors. At the same time, decision makers must believe that the only way to rectify the situation is to join the competitive race by signing FTAs with trade partners. This being so, not only must objective trade data be used, but the subjective evaluations of decision makers must also be included to verify the competitive liberalization hypothesis. By analyzing covariations of long-term trade data and the 1960-2002 EFTA Council records, we find that the EC/EU’s signing of an FTA increases the likelihood of EFTA signing an FTA. This is the case even when we control for trade variables. Moreover, the data from EFTA Council records suggests that the greater the emphasis that ministers place on FTA “word strings”, the greater the likelihood that the EFTA will sign FTAs with other countries. This effect disappears if we control for trade data. Finally, we find that the more concerned EFTA ministers are with a state’s application for EC/EU membership, the more likely it is that an FTA will be signed. Thus,subjectively speaking, the EFTA ministers’ decision to sign FTAs with other countries may be more complicated than argued by theorists of “competitive liberalization”.