Free trade agreements, trade disputes and cross-border mergers and acquisitions

Abstract

This dissertation consists of two independent essays on the interactions between free trade agreements (FTAs), trade disputes, dispute settlement mechanisms and cross-border mergers and acquisitions (M&As). The first essay investigates the effects of the formation of free trade agreements on trade disputes. We construct a unique and comprehensive dataset on inter-country trade disputes from 1995 to 2007. The dataset covers 110 countries and 1130 trade disputes. We find that the incidences of trade disputes between two countries are positively associated with economic size, economic growth, and trade shares. More importantly, we obtain that FTA relationship between two countries reduces the occurrences of trade disputes between them. We also find that FTAs relying on the WTO dispute settlement mechanism further reduce trade disputes between their members compared to FTAs without explicit provisions on trade dispute settlement. By contrast, the dispute-reducing effect is attenuated in FTAs which have their own dispute settlement mechanism. The main results are robust to the control for possible measurement error and endogeneity problem.

In the second essay, we examine the impact of FTA formation on the cross-border mergers and acquisitions. Using the comprehensive M&As dataset of SDC, we find that FTA relationship is associated with more bilateral cross-border M&As and FTA has an investment diversion effect. Second, by exploring the detailed information on acquiring and target firms, we show that FTA relation has larger effect on cross-border M&As between similar countries than diverse countries; and investment diversion effect exists among similar countries. Moreover, though FTA promotes all types of cross-border M&As the investment diversion effect is larger for vertical cross-border M&As. Our results are robust to various measures of M&A activities and econometric methods used.