Why are Preferential Trade Agreements Regional? Increasing Returns, Multinationals and the Geography of Free Trade Agreements

Rodney Ludema

International Trade from University Library of Munich, Germany

Abstract: This paper uses a model of horizontal multinational enterprises to explore the relationship between transportation costs and trade policy cooperation. Tariffs have the effect of attracting foreign direct investment to the benefit of consumers in the host country. As transport costs fall, the incentive to impose tariffs falls and the benefits to cooperation rise. Thus, in a repeated game in which cooperation is limited by a self-enforcement constraint, a reduction in transport costs facilitates free trade. This logic is applied to a three-country model to examine cross-sectional relationships. It is found that if any country is too distant from the others, then global free trade is not attainable. Rather, if two of the countries are within a critical distance of each other and distant from the third country, then the unique outcome is an exclusive free trade agreement between the two adjacent countries. Thus, the model predicts a strong regional bias in preferential trade agreements.

Keywords: regionalism; trade agreements; multinational enterprises; economic geography (search for similar items in EconPapers)
JEL-codes: F13 F15 F23 R12 (search for similar items in EconPapers)
Date: 1999-03-18
Note: Type of Document - pdf; prepared on IBM PC; to print on HP;
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpit:9903002

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