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Free Trade Networks

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  • Taiji Furusawa

    (Yokohama National University)

  • Hideo Konishi

    ()
    (Boston College)

Abstract

The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider a general n-country model in which countries trade differentiated industrial commodities as well as a numeraire good. Countries may be different in the size of the industrial good industry (measure of firms) and the market size (population size). Their incentives to sign an FTA depend on these characteristics of their own countries and those of their partner countries. We show that if all countries are symmetric, a complete global free trade network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitate global trade liberalization, emphasizing the fact that unlike in the case of a CU, each country signing an FTA can have a new FTA with an outside country without consent of other member countries.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 548.

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Length: 35 pages
Date of creation: 04 Dec 2002
Date of revision: 08 Sep 2003
Publication status: published, Journal of International Economics, 72, 310-335, 2007.
Handle: RePEc:boc:bocoec:548

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Keywords: free trade agreements; customs unions; network formation game;

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References

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