Vertical trade and free trade agreements
AbstractWe investigate the effects of free trade agreements (FTAs) on tariffs and welfare in vertical trade. We consider a three-country model, where an FTA is formed between a country exporting a final good and a country exporting an intermediate good. The FTA unambiguously leads to a reduction in the member country's tariff, but may cause the non-member country's tariff level to increase. In the case, where FTA raises the non-member country's tariff level, the FTA increases that country's welfare. In contrast, the FTA may render its member countries better off. This result implies that the formation of an FTA may not always be Pareto-improving.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of the Japanese and International Economies.
Volume (Year): 24 (2010)
Issue (Month): 4 (December)
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Web page: http://www.elsevier.com/locate/inca/622903
Free trade agreements Vertical trade Cournot competition;
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