Mars or Mercury redux: The geopolitics of bilateral trade agreements

• Author: Livia Chițu,Barry Eichengreen,Arnaud Mehl
• DOI: http://doi.org/10.1111/twec.13018
• Date: 01 January 2021
• Published date: 01 January 2021

World Econ. 2021;44:21–44. wileyonlinelibrary.com/journal/twec

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© 2020 John Wiley & Sons Ltd

Received: 2 September 2019

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Revised: 25 June 2020

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Accepted: 3 July 2020

DOI: 10.1111/twec.13018

ORIGINAL ARTICLE

Mars or Mercury redux: The geopolitics of bilateral

trade agreements

BarryEichengreen1,2,3

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ArnaudMehl3,4

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LiviaChiţu4

1University of California, Berkeley, Berkeley, California

2NBER, Cambridge, Massachusetts

3CEPR, London, UK

4European Central Bank, Frankfurt am Main, Germany

KEYWORDS

alliances, geopolitics, international trade agreements

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INTRODUCTION

International trade and international relations have always been joined at the hip. Governments nego-

tiate trade agreements for economic reasons—they see them as enhancing the access of producers to

foreign markets and giving them a leg up in international competition. But they are also drawn to trade

agreements for political reasons.1 They see the more extensive trade as fostering ties with geopolitical

allies.2 They see bilateral trade agreements as heightening their interdependence with and influence

over those partners. Conversely, geopolitical alliances make international trade ties stronger.3

1The literature on the economic benefits of free trade agreements is vast and includes Viner (1950), Krugman (1991),

Baldwin and Venables (1995) and Frankel etal.(1996). A short survey is Baier and Bergstrand (2006).

2As Martin, Mayer and Thoening stress, the Liberal Peace argument, which posits that bilateral trade flows reduce the

probability of a bilateral war by increasing the opportunity cost of conflicts, dates back to Kant (1795); see Martin

etal.(2008). Empirical analyses of the Liberal Peace argument include Polachek (1980); Oneal and Russett (1999);

Mansfield and Pevehouse (2000), Martin etal.(2008); Hegre, Oneal, and Russett (1999), Spolaore and Wacziarg (2016).

The authors are grateful to the editor (Chris Milner), two anonymous referees, Thorsten Beck, Menzie Chinn, Virginia Di

Nino, Michael Ehrmann, Philipp Hartmann, Markus Lampe, Simone Manganelli, Christopher Meissner, Kevin O'Rourke,

Cédric Tille, Philip Sauré and participants to an ECB seminar for comments and suggestions. They are also grateful to Robert

Pahre for sharing his data on bilateral trade agreements pre-World War I. The views expressed in this paper are those of the

authors and do not necessarily reflect those of the ECB or the Eurosystem.

3There is evidence that violence or conflicts between countries can be enormously disruptive of economic activity, especially

international trade (Glick and Taylor 2010; Brock & Hess, 2006). Martin, Mayer, and Thoenig (2012) document

complementarities between economic and political determinants of the geography of regional trade arrangements between

1950 and 2000. Baldwin and Jaimovich (2012) and Vicard (2012) consider military alliances as one potential determinant of

free trade agreements in the modern era.

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EICHENGREEN Et al.

Toparaphrase a recent paper on international finance, governments see international trade as being

from ‘Mars,’ not ‘Mercury’.4

In this paper, we analyse whether bilateral trade agreements are governed by standard gravity

variables or geopolitical factors, as measured by military alliances, using the pre-World War I pe-

riod as a laboratory. Understanding the link between geopolitics and trade is topical now that the

Trump Administration has embarked on a foreign trade policy centred on bilateral engagement. It

has done so amidst growing uncertainty as to whether America will remain a predictable ally of its

geopolitical and commercial partners. The administration's approach to trade emphasises bilateral-

ism, reciprocity and zero-sum logic. It is sceptical of multilateralism and of the rules-based global

order. Its emphasis on bilateral engagement was signalled by President Trump's decision on his first

day in office to withdraw from the Trans-Pacific Partnership (TPP) negotiations. Trump denounced

the 24-year-old North American Trade Agreement as a ‘disaster’ and the ‘worst trade deal maybe

ever’ and pressed ahead with separate bilateral negotiations with Canada and Mexico, ultimately

tabling the USMCA (US–Mexico–Canada) trade agreement as a potential replacement. He called

for correcting the U.S. bilateral trade deficits with its major trade partners while imposing tariffs on

Chinese products.5 He blocked the appointment of new judges to the appeal chamber of the World

Trade Organization (WTO), sparking concern of a return to a pre-WTO era when nations, instead

of following globally agreed rules, used national leverage to negotiate the best possible deal as

judged from a domestic standpoint.6

Meanwhile, uncertainty has developed as to whether America will remain a reliable geopolit-

ical ally. The Trump Administration criticised America's NATO partners for failing to shoulder a

fair share of the defence burden, dismissing the alliance as obsolete. It reneged on commitments

to fight against global security threats, withdrawing from the Joint Comprehensive Plan of Action

on Iran's nuclear programme in May 2018 over the objections of France, Germany and the United

Kingdom.7 On 1 June 2018, it levied tariffs on imports of steel and aluminium from long-standing

military allies, including Canada and the European Union (EU), citing national security concerns.

By then refusing to sign the joint communiqué of G7 Leaders at Charlevoix on 8–9 June 2018,

President Trump raised fundamental questions about the future of a forum traditionally seen as

comprising Washington's closest geopolitical allies. After Mr. Trump called the EU a ‘foe’ on

trade, Donald Tusk, president of the European Council, spoke candidly of transatlantic relations:

‘With friends like Mr. Trump, who needs enemies?’8

The implications of these developments for U.S. trade relations are, at a minimum, unsettling. But

assessing those implications is not straightforward. Causality between trade agreements and geopoli-

tics can run both ways, as explained above. Multilateral trade negotiations and regional trade

4See Eichengreen, Mehl and Chiţu (2019), also courtesy of John Gray's book Men Are from Mars, Women Are from Venus

(Gray 1992). In Roman religion and myth, Mercury was the god of commerce while Mars was the god of war. There is also a

literature that shows that geopolitical considerations matter more broadly for trade. For instance, Berger etal.(2013) provide

evidence that increased US political influence, arising from CIA interventions during the Cold War, was used to create a

larger foreign market for American products, while Fuchs and Klann (2013) show that political compliance matters for

healthy trade relations with China, that is that officially receiving the Dalai Lama reduces exports to China.

5See Swanson (2018).

6See Miles (2018).

7In addition, the U.S. withdrew from the Paris agreement on climate change mitigation in June 2017 on the ground that it

would undermine the U.S. economy and put it as a disadvantage.

8See Baczynska (2018) and Reuters (2018).