A BIT Is Better Than a Lot: Bilateral Investment Treaties and Preferential Trade Agreements

Abstract

The landscape of the global economy is dotted with institutions that regulate investment and trade. In recent years, the number of bilateral investment treaties (BITs) and preferential trade agreements (PTAs), in particular, has grown at a torrid pace; practically every country is a member of at least one—if not many—of these institutions. For all the scholarly attention that these institutions have received, however, there is little research tying BITs and PTAs together. This is surprising, since both aim to increase commerce by making it more predictable. The authors seek to fill this gap in the literature. They argue that a BIT between a developed and a developing country should make it more likely that this pair of states will subsequently form a PTA. That said, the wrinkle in the story is that more is not better in this regard; the authors further argue that a developing country that has many BITs is less likely to conclude a PTA with a wealthy state. The authors test these hypotheses using annual data on pairs of developing and developed countries between 1960 and 2004 and find strong evidence in support of their argument.