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On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

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Author Info

  • Kamal Saggi

    ()
    (Department of Economics, Vanderbilt University)

  • Alan Woodland

    ()
    (Department of Economics, University of New South Wales)

  • Halis Murat Yildiz

    ()
    (Department of Economics, Ryerson University)

Abstract

This paper analyzes a game of trade policy (called Bilateralism) between three countries in which each country chooses whether to liberalize trade preferentially in the form of a Customs Union (CU), multilaterally, or not at all. We also analyze a restricted version of this game (called Multilateralism) under which countries do not have the option to form CUs. The analysis sheds light on the relationship between multilateral and preferential trade liberalization as sanctioned by GATT Article XXIV. We find that when countries have symmetric endowments, global free trade can be achieved without permitting CUs. Allowing for asymmetry, we isolate circumstances where Article XXIV helps further the cause of multilateral liberalization as well as when it does not. Furthermore, we show that Article XXIV's stipulation -- that countries forming a CU not raise tariffs on outsiders -- fails to make multilateral liberalization any more attractive to countries. However, such a tariff restriction does lower the adverse impact of a CU on the non-member.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w16.pdf
File Function: First version, September 2011
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1116.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1116

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Customs Unions; preferential trade agreements; multilateral trade liberalization; GATT; WTO;

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References

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  1. Kyle Bagwell & Robert Staiger, 1994. "Multilateral Tariff Cooperation During the Formation of Customs Unions," International Trade, EconWPA 9410002, EconWPA.
  2. David Vines & Monika Mrazova, 2008. "Is the WTO's Article XXIV Bad?," Economics Series Working Papers 417, University of Oxford, Department of Economics.
  3. Goyal, S. & Joshi, S., 1999. "Bilateralism and free trade," Econometric Institute Research Papers EI 9953-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  4. Syropoulos, Constantinos, 2003. "Rules for the disposition of tariff revenues and the determination of common external tariffs in customs unions," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 387-416, August.
  5. Costas Hadjiyiannis, 2004. "Regionalism and Multilateral Trade Liberalization with Asymmetric Countries," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 12(3), pages 395-411, 08.
  6. Taiji Furusawa & Hideo Konishi, 2002. "Free Trade Networks," Boston College Working Papers in Economics, Boston College Department of Economics 548, Boston College Department of Economics, revised 08 Sep 2003.
  7. John Kennan & Raymond Riezman, 1990. "Optimal Tariff Equilibria with Customs Unions," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 23(1), pages 70-83, February.
  8. Saggi, Kamal & Yildiz, Halis Murat, 2010. "Bilateralism, multilateralism, and the quest for global free trade," Journal of International Economics, Elsevier, Elsevier, vol. 81(1), pages 26-37, May.
  9. Antoni Estevadeordal & Caroline Freund & Emanuel Ornelas, 2008. "Does Regionalism Affect Trade Liberalization Towards Non-Members?," CEP Discussion Papers, Centre for Economic Performance, LSE dp0868, Centre for Economic Performance, LSE.
  10. Raymond Riezman, 1999. "Can Bilateral Trade Agreements Help Induce Free Trade?," CSGR Working papers series, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick 44/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  11. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  12. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, 02.
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  14. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(4), pages 1475-1506, November.
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  17. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
  18. Bond, Eric W. & Riezman, Raymond G. & Syropoulos, Constantinos, 2004. "A strategic and welfare theoretic analysis of free trade areas," Journal of International Economics, Elsevier, Elsevier, vol. 64(1), pages 1-27, October.
  19. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, Elsevier, vol. 42(1), pages 13-29, June.
  20. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, Elsevier, vol. 42(1), pages 1-12, June.
  21. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, Elsevier, vol. 79(1), pages 143-159, September.
  22. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, Elsevier, vol. 41(1-2), pages 153-177, August.
  23. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, Elsevier, vol. 52(2), pages 359-376, December.
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Citations

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Cited by:
  1. James Lake & Halis M. Yildiz, 2014. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Departmental Working Papers, Southern Methodist University, Department of Economics 1403, Southern Methodist University, Department of Economics.
  2. Yildiz, Halis Murat, 2012. "Hub and Spoke Trade Agreements under Oligopoly with Asymmetric Costs," MPRA Paper 36501, University Library of Munich, Germany, revised 07 Feb 2012.
  3. Mavroidis, Petros C., 2011. "Always look at the bright side of non-delivery: WTO and Preferential Trade Agreements, yesterday and today," World Trade Review, Cambridge University Press, Cambridge University Press, vol. 10(03), pages 375-387, July.

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