Free Trade Networks

Taiji Furusawa and Hideo Konishi

No 2003.55, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider a general n-country model in which countries trade differentiated industrial commodities as well as a numeraire good. Countries may be different in the size of the industrial good industry (measure of firms) and the market size (population size). Their incentives to sign an FTA depend on these characteristics of their own countries and those of their partner countries. We show that if all countries are symmetric, a complete global free trade network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitate global trade liberalization, emphasizing the fact that unlike in the case of a CU, each country signing an FTA can have a new FTA with an outside country without consent of other member countries.

Keywords: Free trade agreement; Customs union; Global free trade; Theory of network; Pairwise stability (search for similar items in EconPapers)
JEL-codes: C71 C78 F12 F13 F15 (search for similar items in EconPapers)
Date: 2003-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Free trade networks (2007)
Working Paper: Free Trade Networks (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2003.55

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