Hub-and-Spoke Free Trade Areas

George Deltas (), Klaus Desmet () and Giovanni Facchini ()

No 5960, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes how the sequential formation of free trade areas affects the volume of trade between member countries. In a three--country, three--good model, if two countries have a free trade area, and both sign a similar agreement with the third, trade between the two decreases, and welfare rises in both. However, if only one of them signs an FTA with the third, a hub-and-spoke pattern arises. If the two spokes have a comparative advantage in different goods, trade between the two countries in the initial FTA increases, with welfare rising in the hub and falling in the spoke. We provide evidence consistent with the theoretical model when studying the experience of Israel.

Keywords: free trade areas; hub-and-spoke; Israel; trade volumes (search for similar items in EconPapers)
JEL-codes: F11 F13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2006-11
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