Institutional embeddedness of market integration: The formation of free trade agreements in 1957–2008

Abstract

Why do certain pairs of countries establish free trade agreements (FTAs)? Existing studies on FTAs have examined internal attributes of countries such as neoliberalism or the interest of domestic political elites. FTAs as a type of market integration across national borders create high uncertainties in the absence of supra-national political authorities. To explain how countries cope with uncertainties, this article presents the institutional embeddedness argument to explain FTA formation among countries from 1957 to 2008, focusing on the effects of IGO ties and other types of relationships between countries. The findings demonstrate that, controlling for trade and political alliances, IGO ties positively enhance the chance of an FTA. Social and cultural IGOs also promote FTA formation as much as economic IGOs. More importantly, the effect of socio-cultural IGO ties increases as the distance between countries increases. These findings suggest that institutional ties between countries are an important channel for enhancing socio-cultural awareness, affinities, and trust as well as sharing economic and technical information for FTAs as an institutionalization project of market integration between countries.