Multilateral Trade Liberalisation and Financial Openness

Abstract This article examines the effect of multilateral trade liberalisation (MTP) on financial openness (capital account openness). Results show that MTP induces higher financial openness in low‐income countries (LICs) and old industrialised countries. For other subsamples, the effect is negative and could be explained by the fact that countries that lack the requisite institutions and financial systems to derive full benefits from higher financial openness would likely limit their capital account openness while trying to maximise their benefits from opportunities offered by greater MTP. Greater multilateral cooperation on trade matters would be particularly beneficial to LICs.