Beyond Trade Creation: Free Trade Agreements and Trade Disputes

This paper investigates the effects of the formation of free trade agreements (FTAs) 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, thereby lending partial support to the “capacity hypothesis” in the dispute literature. More importantly, we obtain that FTAs 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 provisions on trade dispute settlement. By contrast, the dispute-reducing effect is mitigated in FTAs which have their own dispute settlement mechanisms. The main results are robust to the control for possible measurement error and endogeneity problem.