 How Does Uncertainty Affect the Choice of Trade Agreements?Elie Appelbaum and Mark Melatos No 2012-08, Working Papers from University of Sydney, School of Economics Abstract: This paper analyzes how uncertainty and the timing of its resolution influence the formation and design of regional trade agreements. Two sources of uncertainty ? in demand and costs ? are considered. We compare the case in which uncertainty is resolved "early" (before tariffs are chosen), with the case in which uncertainty is resolved "late" (after tariffs are chosen). These cases are, in turn, compared with the benchmark case of no uncertainty. We demonstrate that, as long as some decisions are made after uncertainty is resolved, trade agreements have option values. These option values differ across agreements, reflecting members' different degrees of (trade policy) freedom to respond to changes in the trading environment. Moreover, these option values may be sufficiently large as to lead prospective members to opt for a more flexible trading arrangement (such as a free trade area) over a less flexible agreement (such as a customs union). Indeed, countries may even prefer to stand alone than join a free trade area under some circumstances. Finally, we show that the timing of the resolution of uncertainty can significantly impact the type of trade agreement that countries wish to form. Keywords: Resolution of Uncertainty; Uncertainty; Customs Union; Free Trade Area; Trade Agreement (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:syd:wpaper:2123/8207 Access Statistics for this paper More papers in Working Papers from University of Sydney, School of Economics Contact information at EDIRC. |
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