WHY ARE TRADE AGREEMENTS REGIONAL? A Theory Based on Noncooperative Networks

Benjamin Zissimos

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper argues that free trade agreements (FTAs) are regional because, in their absence, optimal tariffs are higher against (close) regional partners than (distant) countries outside the region. Optimal tariffs shift rents from foreign firms to domestic citizens. Lower transport costs imply higher rents and therefore higher tariffs. So regional FTAs have a higher payoff than non-regional FTAs. Therefore, only regional FTAs may yield positive gains when sponsoring a FTA is costly. To analyze equilibrium, standard theory of non-cooperative networks is extended to allow for asymmetric players. Naive best response dynamics show that ‘trade blocks can be stepping blocks’ for free trade.

Keywords: Importance Sampling; Filtering; Particle filter; Simulation; SIR; State space (search for similar items in EconPapers)
JEL-codes: C73 F02 F13 F15 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2002
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Working Paper: Why Are Trade Agreements Regional? A Theory based on Noncooperative Networks (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:652

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