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

Paul Missios, Kamal Saggi (k.saggi@vanderbilt.edu) and Halis Yildiz

No 15-00011, Vanderbilt University Department of Economics Working Papers from Vanderbilt 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 reflects the relatively flexible 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 (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2015-09-16
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (1)

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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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