A strategic and welfare theoretic analysis of free trade areas

Eric Bond, Raymond Riezman and Constantinos Syropoulos ()

Chapter 8 in International Trade Agreements and Political Economy, 2013, pp 101-127 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe construct a three-country model to determine how the formation of free trade areas (FTAs) affects optimal tariffs and welfare. We find that, at constant rest of the world (ROW) tariffs, the adoption of internal free trade induces union members to reduce their external tariffs below the Kemp-Wan [J. Int. Econom. 6 (1976) 95-97] level, and causes ROW's terms of trade to improve and its welfare to rise. When ROW also behaves optimally, its policy response to the formation of the FTA is to raise tariffs. Generally, FTA members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large. We also demonstrate how FTAs may undermine the attainment of global free trade.

Keywords: International Trade; Political Economy; Theory of International Free Trade Agreements; Customs Unions; Tariff Dynamics; Storable Votes (search for similar items in EconPapers)
Date: 2013
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Journal Article: A strategic and welfare theoretic analysis of free trade areas (2004)
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