On the different geographic characteristics of Free Trade Agreements and Customs Unions

James Lake and Halis Yildiz

Journal of International Economics, 2016, vol. 103, issue C, 213-233

Abstract: Casual observation reveals a striking phenomenon of Preferential Trade Agreements (PTAs): while Customs Unions (CUs) are only intra-regional, Free Trade Agreements (FTAs) are inter and intra-regional. Using a farsighted dynamic model, we endogenize the equilibrium path of PTAs among two close countries and one far country. Rising transport costs mitigate the cost of discrimination faced by the far country as a CU non-member and diminish the value of preferential access as a CU member. Thus, sufficiently large transport costs imply that an FTA is the only type of PTA that can induce the far country's participation in PTA formation. Unlike CU formation, FTA formation can induce participation because FTAs provide a flexibility benefit: an FTA member can form further PTAs with non-members but a CU member must do so jointly with all existing members. Hence, in equilibrium, CUs are intra-regional while FTAs are intra- and inter-regional.

Keywords: Free Trade Agreement; Customs Union; Flexibility; Coordination; Geography; Farsighted networks (search for similar items in EconPapers)
JEL-codes: C71 F12 F13 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Working Paper: On the different geographic characteristics of Free Trade Agreements and Customs Unions (2016)
Working Paper: On the different geographic characteristics of Free Trade Agreements and Customs Unions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:103:y:2016:i:c:p:213-233

DOI: 10.1016/j.jinteco.2016.09.003

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