Estimating trade policy interdependence when spatial weights are endogenous

Christian W. Martin (University of Kiel) & Steffen Mohrenberg (ETH Zürich)

Trade policy making has frequently been cast as a process in which decisions over trade policy in one country are influenced by decisions over trade policy in other countries (e.g. Simmons/Elkins; Martin/Schneider 2007). In contrast to existing accounts, this paper treats the degree of influence between countries as endogenous. Specifically, we use trade flows between countries as a “spatial” weight with which to determine the importance of trade policies abroad. We argue that these trade flows will change with trade policies. Hence, we are confronted with endogenous spatial weights. We present a network based model that can handle such endogeneity and discuss the results. Substantially, we show that taking into account endogeneity and interdependence will change the results in comparison to estimates that treat such processes as exogenous.

Estimating trade policy interdependence when spatial weights are endogenous