We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both building bloc' and stumbling bloc' effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10721.
Length: Date of creation: Sep 2004 Date of revision: Handle: RePEc:nbr:nberwo:10721
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Find related papers by JEL classification: C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Bard Harstad, 2006.
"Flexible Integration,"
Discussion Papers
1428, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Monika Mrazova & David Vines & Ben Zissimos, 2009.
"Is the WTO's Article XXIV Bad?,"
Working Papers
0902, Department of Economics, Vanderbilt University.
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