External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements

Paul Missios, Kamal Saggi () and Halis Yildiz

No 47, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: In a game of endogenous trade agreements between three countries, we show that while the pursuit of customs unions (CUs) prevents global free trade from emerging as a coalition-proof Nash equilibrium, the pursuit of free trade agreements (FTAs) does not. This result refl?ects the relatively ?exible nature of FTAs: whereas each FTA member can independently undertake further trade liberalization with respect to the non-member, CU members must do so as a group due to their common external tariff. By diverting members?exports away from the non-member, both types of trade agreements induce the non-member to voluntarily lower its import tariffs.

Keywords: Free Trade Agreement; Customs Union; Hub and Spoke Agreements; Free Trade; Optimal Tariffs; PTA; FTA. (search for similar items in EconPapers)
JEL-codes: F11 F12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-09, Revised 2015-09
New Economics Papers: this item is included in nep-int
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https://www.arts.ryerson.ca/economics/repec/pdfs/wp047.pdf First version, 2014 (application/pdf)
https://www.arts.ryerson.ca/economics/repec/pdfs/wp047R.pdf Revised version, 2015 (application/pdf)
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Related works:
Chapter: External trade diversion, exclusion incentives and the nature of preferential trade agreements (2018)
Journal Article: External trade diversion, exclusion incentives and the nature of preferential trade agreements (2016)
Working Paper: External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements (2015)
Working Paper: External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements (2014)
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