Welfare effects of preferential trade agreements under optimal tariffs
Kamal Saggi () and
Halis Yildiz
MPRA Paper from University Library of Munich, Germany
Abstract:
In a three country model with endogenous tariffs, this paper evaluates and contrasts the welfare effects of free trade agreements (FTAs) and customs unions (CUs) — the two most commonly occurring preferential trade agreements (PTAs). We show that if the external tariff of a PTA is not too high, it benefits both members and non-members. We also highlight the implications of a key (but commonly ignored) distinction between the two types of PTAs: while an FTA member can form an another (independent) FTA with an existing non-member, a CU member cannot. Under a pair of independent bilateral FTAs, the common member’s welfare is higher than that under free trade. Furthermore, if the common member is relatively efficient compared to the other two countries, such a ‘hub and spoke’ pattern of FTAs can yield higher global welfare than free trade. By contrast, such an outcome is never possible under a CU.
Keywords: Free Trade Agreements; Customs Unions; External Tariffs; Welfare; Intraindustry Trade; Oligopoly (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 2005-12-15
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Citations: View citations in EconPapers (2)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:17562
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