International Trade, Regional Free Trade Agreements, and Economic Development

Scott L. Baier () and Jeffrey H. Bergstrand ()

Review of Development Economics, 1997, vol. 1, issue 2, pages 153-70

Abstract: In 1991, Krugman illustrated that natural (regional) free trade agreements (FTAs) are likely to be welfare-enhancing if intercontinental transport costs are prohibitively high, but are likely to be welfare-reducing if such costs are zero. In 1995, Frankel, Stein and Wei extended the analysis to consider positive but nonprohibitive transport costs. This paper extends these models to allow for countries of different economic size. Large countries will tend to have higher relative wages, influencing the relative gains and losses from natural FTAs. For even modest differences in size, intracontinental FTAs are welfare-enhancing for larger countries, regardless of strong preferences for diversity or low intercontinental transport costs. Copyright 1997 by Blackwell Publishing Ltd

Date: 1997

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