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TRADE AGREEMENTS: Why some are ‘fixed-term’ while others are ‘evergreen’

  • Published Date: December 2015

TRADE AGREEMENTS: Why some are ‘fixed-term’ while others are ‘evergreen’

Regional trade agreements are more likely to be of fixed duration if they cover trade in commodities rather than trade in services or high technology products. That is the central finding of research by Sergei Guriev and Mikhail Klimenko, published in the December 2015 issue of the Economic Journal. Their study explains that ‘fixed-term’ agreements provide incentives for the initial investment, but leave the parties the flexibility to revisit the need for future investment – which can be substantial for trade in commodities.

The vast majority of the World Trade Organization's members are signatory to one or more bilateral, regional or plurilateral trade agreements of a preferential nature. Some of these trade agreements are ‘evergreen’: they are concluded for indefinite time; and the contracting parties can withdraw from the agreement by giving advance notice to their counterparts. Other agreements are fixed-term, stipulating trade for a predefined period of time.

The new study tries to understand which international trade relationships are more likely to be covered by evergreen agreements and which are more likely to be covered by fixed-term agreements.

The researchers find that fixed-term agreements are more common between parties whose bilateral trade is mostly in homogeneous goods – commodities, for example. In contrast, evergreen bilateral trade agreements (with an advance termination notice) are characteristic of countries that trade primarily in manufacturing goods and services.

The reason for this difference is that fixed-term agreements and evergreen agreements provide different dynamic incentives for trade-related investments.

Many governments undertake investments as part of export promotion and industrial targeting policies. Export-oriented economic activities often require specific inputs for which markets do not exist and which have characteristics of public assets – for example, regulations, standards, certification, accreditation, and provision of certain elements of infrastructure such as pipelines – with a high degree of specificity to selected economic activities and export destinations.

The researchers’ analysis implies that fixed-term agreements are more likely to provide efficient incentives for the initial investment but leave the parties the flexibility to revisit the need for future investment. This is useful in the sectors where investments in trade-related infrastructure are one-off and bulky.

If the agreement covers trade in multiple sectors or differentiated goods or services, inter-sectoral spillovers of investment benefits are likely to make the parties choose an evergreen agreement (with an advance termination notice).

The researchers go through all the current bilateral and plurilateral trade agreements to which the United States is a party. They find that it is indeed true that agreements are more likely to be of fixed duration if they cover trade in commodities rather than trade in services or high technology products.

They also discuss in detail several cases of trade agreements involving large-scale investments – for example, cross-border natural gas pipelines, and lumber exporting terminals. They show that the features of these agreements are generally consistent with their analysis.

ENDS


Notes for editors: ‘Duration and Term Structure of Trade Agreements’ by Sergei Guriev and Mikhail Klimenko is published in the December 2015 issue of the Economic Journal.

Sergei Guriev is at Sciences Po in Paris. Mikhail Klimenko is at the Georgia Institute of Technology.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh); Sergei Guriev via email: sergei.guriev@sciencespo.fr; or Mikhail Klimenko via email: Mikhail.Klimenko@econ.gatech.edu