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Deepening of Regional Integration and Multilateral Trade Agreements

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  • Bond, Eric W
  • Syropoulos, Costas
  • Winters, L. Alan

Abstract

We consider a simple three-country, multi-commodity trade model in which two custom union members that have successfully coordinated their external tariff policies are in the process of deepening the integration of their internal markets through the removal of tariffs on intra-union trade. Union and non-union countries cannot sign binding trade agreements. Owing to repeated interactions, however, they can sustain cooperative outcomes with the use of history-dependent strategies. The goal of this paper is to examine how the deepening of integration affects the set of incentive-compatible tariff agreements these parties can support. We derive conditions under which Kemp-Wan (1976) adjustments in the external tariffs of union members are sustainable and we use these adjustments as a frame of reference to evaluate the actual tariff-setting incentives of trading partners. Our analysis reveals that the deepening of integration may enlarge the set of sustainable tariff agreements with the outside country, and that this possibility crucially depends on the degree of substitutability in consumption. We also investigate the effects of integration on sustainable levels of welfare and extend our analysis to consider the effects of political economy factors.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1317.

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Date of creation: Jan 1996
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Handle: RePEc:cpr:ceprdp:1317

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Keywords: Europe '1992'; Kemp-Wan Tariff Adjustments; Regional Integration; Tariff Negotiations;

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References

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  2. Kyle Bagwell & Robert Staiger, 1994. "Multilateral Tariff Cooperation During the Formation of Customs Unions," International Trade 9410002, EconWPA.
  3. Winters, L. Alan, 1996. "Regionalism versus Multilateralism," CEPR Discussion Papers 1525, C.E.P.R. Discussion Papers.
  4. Richardson, Martin, 1995. "Tariff revenue competition in a free trade area," European Economic Review, Elsevier, vol. 39(7), pages 1429-1437, August.
  5. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  6. Bond, E.W. & Syropoulos, C., 1993. "Trading Blocs and the Sustainability of Inte-regional Cooperation," Papers 5-93-3, Pennsylvania State - Department of Economics.
  7. Srinivasan, T. N., 1997. "The common external tariff of a customs union: Alternative approaches," Japan and the World Economy, Elsevier, vol. 9(4), pages 447-465, December.
  8. John Kennan & Raymond Riezman, 1990. "Optimal Tariff Equilibria with Customs Unions," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 70-83, February.
  9. Carlo Perroni & John Whalley, 2000. "The new regionalism: trade liberalization or insurance?," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 1-24, February.
  10. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  11. Bond, Eric W. & Syropoulos, Constantinos & Winters, L. Alan, 2001. "Deepening of regional integration and multilateral trade agreements," Journal of International Economics, Elsevier, vol. 53(2), pages 335-361, April.
  12. Syropoulos, Constantinos, 1999. "Customs Unions and Comparative Advantage," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 239-66, April.
  13. Kyle Bagwell & Robert W. Staiger, 1993. "Multilateral Tarriff Cooperation During the Formation of Regional Free Trade Areas," NBER Working Papers 4364, National Bureau of Economic Research, Inc.
  14. Rodney D. Ludema, 1998. "On the Value of Preferential Trade Agreements in Multilateral Negotiations," International Trade 9802003, EconWPA.
  15. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
  16. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
  17. Lawrence H. Summers, 1991. "Regionalism and the world trading system," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 295-301.
  18. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
  19. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644 Elsevier.
  20. André Sapir & Richard Baldwin & Daniel Cohen & Anthony Venables, 1999. "Market integration, regionalism and the global economy," ULB Institutional Repository 2013/8074, ULB -- Universite Libre de Bruxelles.
  21. Richardson, Martin, 1995. "On the Interpretation of the Kemp/Wan Theorem," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 696-703, October.
  22. Kyle Bagwell & Robert W. Staiger, 1997. "Regionalism and Multilateral Tariff Cooperation," NBER Working Papers 5921, National Bureau of Economic Research, Inc.
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