Preferential Trade Agreements and Rules of the Multilateral Trading System

Kamal Saggi (), Woan Foong Wong and Halis Yildiz

MPRA Paper from University Library of Munich, Germany

Abstract: Preferential trade agreement (PTA) members have to eliminate internal tariffs with each other but are allowed to discriminate against non-members. This can be in potential conflict with the WTO's overall non-discrimination clause. Using a competing exporters model of endogenous trade agreement formation, we study the central rules that govern PTAs. We find that the free trade agreements' (FTAs) requirement to eliminate internal tariffs increases total welfare when circumstances are such that global free trade is infeasible. However, it also reduces the likelihood of reaching global free trade. We also find that the MFN constraint does not just contribute to the achievement of global free trade but also delivers a welfare-superior outcome when global free trade is not possible. Finally, we show that the MFN constraint complements the PTA rules in achieving global free trade for only FTAs but not customs unions (CUs). However, when global free trade is infeasible, the MFN constraint is welfare improving for both types of PTAs. We conclude that while the likelihood of global free trade within the WTO requirements depends on the nature of PTAs, these requirements are necessarily welfare improving in a tariff-ridden world.

Keywords: WTO; Coalition proof Nash equilibrium; Free Trade Agreement; Customs Union (search for similar items in EconPapers)
JEL-codes: F11 F12 (search for similar items in EconPapers)
Date: 2017-01-04
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Preferential Trade Agreements and Rules of the Multilateral Trading System (2017)
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