Why Are Trade Agreements Regional? A Theory based on Noncooperative Networks

Benjamin Zissimos

No 269465, Economic Research Papers from University of Warwick - Department of Economics

Abstract: This paper argues that free trade agreements (FTAs) are regional because, in their absence, optimal tari¤s are higher against (close) regional partners than (distant) countries outside the region. Optimal tari¤s shift rents from foreign firms to domestic citizens. Lower transport costs imply higher rents and therefore higher tari¤s. So regional FTAs have a higher payo¤ than non-regional FTAs. Therefore, only regional FTAs may yield positive gains when sponsoring a FTA is costly. To analyze equilibrium, standard theory of non-cooperative networks is extended to allow for asymmetric players. Naive best response dynamics show that ‘trade blocks can be stepping blocks’ for free trade.

Keywords: Agricultural and Food Policy; International Relations/Trade (search for similar items in EconPapers)
Pages: 42
Date: 2002-10-10
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269465

DOI: 10.22004/ag.econ.269465

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