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Preferential Trade Agreements and Welfare: General Equilibrium Analysis

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This paper studies the welfare effects of a preferential trade agreement (PTA) within a general equilibrium framework following Eaton and Kortum (2002) and conducts a comparative statics analysis of the equilibrium. The paper provides a closed-form analysis with no assumption of balanced trade and analyzes how a PTA affects the price level, trade flows, and welfare of both member and nonmember countries. We show that a PTA decreases the price level of not only member but also nonmember countries. We also show that a positive coalition externality can arise in that a nonmember country can gain from the establishment of a PTA. Our analysis indicates that countries possessing a large nonmanufacturing sector relative to the economy or a high level of technology are more likely to gain from a coalition externality. Under no assumption of balanced trade, our analysis demonstrates that changes in tariff revenues and labor mobility between tradable and nontradable sectors are a key factor affecting welfare and, thus, countries’ incentives to join a PTA. Finally, using a calibrated model for 38 countries, we estimate price and welfare changes under several scenarios of the Trans-Pacific Partnership (TPP) and numerically demonstrate our theoretical results. equilibrium model to explore how a Trans-Pacific Partnership affects each country’s welfare and trade flows. We decompose the total change of trade flows from member countries into income effects and substitution effects, and investigate the factors that affect trade flows. We demonstrate that a positive coalition externality could exist in that some nonmember countries could gain more than member countries and further investigate under which circumstances it arises.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 482.

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Date of creation: 10 Jul 2013
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Handle: RePEc:qld:uq2004:482

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  1. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 106-16, March.
  2. Juyoung Cheong & Shino Takayama, 2013. "Who Gains the Most in Preferential Trade Agreements?," Discussion Papers Series, School of Economics, University of Queensland, Australia 475, School of Economics, University of Queensland, Australia.
  3. John B. Burbidge & James A. DePater & Gordon M. Myers & Abhijit Sengupta, 1996. "A Coalition-formation Approach to Equilibrium Federations and Trading Block s," Department of Economics Working Papers 1996-05, McMaster University.
  4. Wilson, Charles A, 1980. "On the General Structure of Ricardian Models with a Continuum of Goods: Applications to Growth, Tariff Theory, and Technical Change," Econometrica, Econometric Society, Econometric Society, vol. 48(7), pages 1675-1702, November.
  5. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  6. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  7. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, Elsevier, vol. 54(1), pages 75-96, June.
  8. Arnaud Costinot & Dave Donaldson & Ivana Komunjer, 2010. "What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas," NBER Working Papers 16262, National Bureau of Economic Research, Inc.
  9. Helpman, Elhanan & Antras, Pol & Aghion, Philippe, 2007. "Negotiating Free Trade," Scholarly Articles 3351239, Harvard University Department of Economics.
  10. Al-Najjar, Nabil I., 2004. "Aggregation and the law of large numbers in large economies," Games and Economic Behavior, Elsevier, Elsevier, vol. 47(1), pages 1-35, April.
  11. Patrick J. Kehoe & Timothy J. Kehoe, 1994. "Capturing NAFTA's impact with applied general equilibrium models," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 17-34.
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Cited by:
  1. Juyoung Cheong & Shino Takayama, 2014. "The Trade And Welfare Analysis Of The TPP," Discussion Papers Series, School of Economics, University of Queensland, Australia 509, School of Economics, University of Queensland, Australia.

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