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Vertical trade and free trade agreements

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  • Kawabata, Yasushi
  • Yanase, Akihiko
  • Kurata, Hiroshi

Abstract

We 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.

Suggested Citation

  • Kawabata, Yasushi & Yanase, Akihiko & Kurata, Hiroshi, 2010. "Vertical trade and free trade agreements," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 569-585, December.
    • Handle: RePEc:eee:jjieco:v:24:y:2010:i:4:p:569-585
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    References listed on IDEAS

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    3. Huria, Sugandha, 2020. "Gains from Free Trade Agreements: A Theoretical Analysis," MPRA Paper 109815, University Library of Munich, Germany.
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