PREFERENTIAL TRADE AND WELFARE WITH DIFFERENTIATED PRODUCTS

Denise Konan and Keith Maskus

No 201101, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: We consider analytically and numerically the welfare tradeoffs inherent in a preferential trade area (PTA) with products differentiated by region of origin. For a small open economy in such a setting, welfare gains are associated with higher trade volumes within the PTA. However, welfare losses are induced by declining tariff revenues on trade with nonmember countries. We show that both effects are concave, while one is a non-monotonic and the other a potentially non-monotonic function of pre-PTA partner trade shares. Therefore, the relationship between initial partner import shares and direct static welfare impacts of a PTA are theoretically ambiguous. This finding contrasts with conventional results in the homogeneous-goods case, whereby the smaller is the pre-agreement trade volume with a potential partner the more beneficial is a PTA.

Keywords: preferential trade agreements; differentiated products (search for similar items in EconPapers)
JEL-codes: F13 F15 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2011-02-14
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (1)

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http://www.economics.hawaii.edu/research/workingpapers/WP_11-1.pdf First version, 2011 (application/pdf)

Related works:
Journal Article: Preferential Trade and Welfare with Differentiated Products (2012)
Working Paper: Preferential Trade and Welfare with Differentiated Products (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hai:wpaper:201101

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