External trade diversion, exclusion incentives and the nature of preferential trade agreements

Paul Missios, Kamal Saggi and Halis Yildiz ()

Journal of International Economics, 2016, vol. 99, issue C, 105-119

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: F11 F12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Related works:
Chapter: External trade diversion, exclusion incentives and the nature of preferential trade agreements (2018)
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 (2015)
Working Paper: External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:99:y:2016:i:c:p:105-119

DOI: 10.1016/j.jinteco.2016.01.002

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