Do free trade agreements affect tariffs of non-member countries? A theoretical and empirical investigation

Halis Yildiz, Kamal Saggi () and Andrey Stoyanov

No 51, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: In this paper, we investigate both theoretically and empirically the effects of free trade agreements (FTAs) on the tariffs of non-member countries. Our theoretical framework draws on the comparative advantage based trade model of Horn, Maggi, and Staiger (2010). In this model, since marginal costs of production are increasing with output, if a few countries form an FTA and start trading more with each other, they simultaneously become less willing to export to rest of the world a phenomenon we call external trade diversion. Such diversion reduces the ability and the incentive of non-member countries to manipulate their terms of trade, a mechanism that induces them to lower their tariffs on FTA members. We provide an empirical confirmation of this insight using industry- level bilateral trade data for 192 importing and 253 exporting countries, along with the information on all FTAs formed in the world during 1989-2011. Our analysis provides a rather convincing verification of the terms of trade theory since the formation of an FTA between a few countries can be reasonably interpreted as an exogenous event from the perspective of the rest of the world.

Keywords: Free Trade Agreement; Terms of Trade; Optimal Tariffs (search for similar items in EconPapers)
JEL-codes: F13 F14 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2015-09
New Economics Papers: this item is included in nep-cse and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.arts.ryerson.ca/economics/repec/pdfs/wp051.pdf (application/pdf)

Related works:
Chapter: Do Free Trade Agreements Affect Tariffs of Nonmember Countries? A Theoretical and Empirical Investigation (2018)
Journal Article: Do Free Trade Agreements Affect Tariffs of Nonmember Countries? A Theoretical and Empirical Investigation (2018)
Working Paper: Do free trade agreements affect tariffs of non-member countries? A theoretical and empirical investigation (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rye:wpaper:wp051

Access Statistics for this paper

More papers in Working Papers from Toronto Metropolitan University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Doosoo Kim ().