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Free‐Trade Areas and Welfare: An Equilibrium Analysis

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  • Sang‐Seung Yi

Abstract

This paper examines the welfare effects of the formation of a free‐trade area. When a country is constrained to charge lower tariffs on imports from some countries, it is in its interest to reduce external tariffs as well. In alinear‐quadratic model of intraindustry trade, the reduction in external tariffs induced by free‐trade agreements is sufficiently large to make nonmember countries better off. Since only privately beneficial free‐trade agreements are signed voluntarily, the formation of a free‐trade area is a Pareto improvement. Owing to free‐riding problems, however, the global free‐trade area may not be a stable outcome.

Suggested Citation

  • Sang‐Seung Yi, 2000. "Free‐Trade Areas and Welfare: An Equilibrium Analysis," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 336-347, May.
    • Handle: RePEc:bla:reviec:v:8:y:2000:i:2:p:336-347
    DOI: 10.1111/1467-9396.00225
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    Cited by:

    1. Yanase, Akihiko & Tsubuku, Masafumi, 2022. "Trade costs and free trade agreements: Implications for tariff complementarity and welfare," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 23-37.
    2. Akihiko Yanase & Hiroshi Kurata, 2022. "Domestic product standards, harmonization, and free trade agreements," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(3), pages 855-885, August.
    3. Smita Nath, 2013. "Free Trade Zones and Outstanding Debt," Foreign Trade Review, , vol. 48(2), pages 203-218, May.
    4. Chang, Winston W. & Chen, Tai-Liang & Saito, Tetsuya, 2021. "Formation of symmetric free-trade blocs, optimal tariff structure, and world welfare," Journal of Asian Economics, Elsevier, vol. 77(C).

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