On the different geographic characteristics of Free Trade Agreements and Customs Unions

James Lake and Halis Yildiz

No 1603, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: Casual observation reveals a striking phenomenon of Preferential Trade Agreements (PTAs) : while Customs Unions (CUs) are only intra-regional, Free Trade Agreements (FTAs) are inter and intra-regional. Using a farsighted dynamic model, we endogenize the equilibrium path of PTAs among two close countries and one far country. Rising transport costs mitigate the cost of discrimination faced by the far country as a CU non-member and diminish the value of preferential access as a CU member. Thus, sufficiently large transport costs imply an FTA is the only type of PTA that can induce the far country's participation in PTA formation. Unlike CU formation, FTA formation can induce participation because FTAs provide a flexibility benefit an FTA member can form further PTAs with non-members but a CU member must do so jointly with all existing members. Hence, in equilibrium, CUs are intra-regional while FTAs are intra- and inter-regional.

Keywords: Free Trade Agreement; Customs Union; flexibility; coordination; geography; networks; farsighted (search for similar items in EconPapers)
JEL-codes: C71 F12 F13 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-gth, nep-int and nep-net
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Citations: View citations in EconPapers (34)

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Related works:
Journal Article: On the different geographic characteristics of Free Trade Agreements and Customs Unions (2016)
Working Paper: On the different geographic characteristics of Free Trade Agreements and Customs Unions (2015)
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