Free Trade Agreements with cross-country fixed geo-political constraints

The paper explores the role of the gravity variables in explaining the FTA-s formation. We develop a new theoretical benchmark for the use of the gravity equation modeling them as fixed resources in the budget constraint of the Nash equilibrium definition of an FTA. We show the existence of an endogenous relationship between gravity variables and bilateral trade so that we code FTA-s as a quantitative variable and we use the simultaneous equations method of estimation on 30195 observations from 1960-2000. There is evidence for bilateral trade being the main determinant of free trade agreements. Other statistically significant relationships are the sharing a common language or common cultural heritages well as being a former colony of the same colonizer which are positively correlated with the FTA formation