What Affects Trade Disputes

Abstract

This paper investigates the determinants of trade disputes, with the focus on the impacts of free trade agreements (FTAs) on trade disputes between FTA member countries. To this end, we collect a comprehensive and unique dataset on trade disputes between countries from 1995 to 2007. The dataset covers 121 countries and 1130 trade disputes. We find that the incidences of trade disputes between two countries are positively associated with their economic size, economic growth and trade share. These findings lend support to the “power hypothesis” and “capacity hypothesis”. More importantly, we obtain that FTA between two countries reduces the occurrences of trade disputes. Finally, we observe that FTAs relying on the WTO dispute settlement mechanisms further reduce trade disputes between their members, compared to FTAs without provisions on trade dispute settlement, whereas FTAs with their own dispute settlement mechanisms have the opposite effect. The above results hold for both primary trade disputes and WTO trade disputes. The main results are robust to the controlling for possible measurement error and endogeneity problem.