Formation of symmetric free-trade blocs, optimal tariff structure, and world welfare

Winston Chang, Tai-Liang Chen and Tetsuya Saito

Journal of Asian Economics, 2021, vol. 77, issue C

Abstract: We present a new tariff-game rule and a new numéraire rule in Krugman's celebrated model to form symmetric trading blocs. We hold that to maintain logical consistency in a world of symmetric trading blocs, an individual bloc should act on the actions of other individual external blocs in a one-to-one fashion, rather than to the actions of the rest of the world as a whole as assumed by Krugman, and show that Krugman's seemingly innocuous choice of the world price of a given good as the numéraire will produce asymmetry in the optimum Nash equilibrium tariff. We prove that the optimal tariff schedule is monotonically decreasing in our relative bloc size, and that the world welfare increases with our new relative bloc size as the latter grows beyond the lowest-welfare pessimal number, which is rather small by our simulations. Though confined to symmetric trading blocs, this paper fortifies the analytical foundation of Krugman's model. In some sense, it reinforces Kemp–Wan–Shimomura's and Ohyama–Panagariya–Krishna's results with the provisos that countries are symmetric and interact mutually in a symmetric fashion without a compensation scheme. It strengthens the case of regionalism as a stepping stone (building bloc) toward a complete world economic integration.

Keywords: Symmetric free-trade blocs; Bloc size; Pessimal number; Nash tariff equilibrium; Economic integration (search for similar items in EconPapers)
JEL-codes: B40 D60 F10 F13 F15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:77:y:2021:i:c:s1049007821001020

DOI: 10.1016/j.asieco.2021.101373

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