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Multilateral Tariff Cooperation During the Formation of Regional Free Trade Areas

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  • Kyle Bagwell

    (Northwestern University)

  • Robert Staiger

    (University of Wisconsin)

Abstract

We explore the impact of the formation of regional free trade agreements on the ability of countries to maintain low cooperative multilateral tariffs. We assume that countries can not make binding international commitments, but are instead limited to self-enforcing arrangements. Specifically, we model cooperation in multilateral trade policy as involving a constant balance between, on the one hand, the gains from deviating unilaterally from an agreed-upon trade policy, and on the other, the discounted expected future benefits of maintaining multilateral cooperation, with the understanding that the latter would be forfeited in the trade war which followed a unilateral defection in pursuit of the former. In this context, we explore the way in which the formation of regional free trade agreements upsets the balance between current and future conditions, and trace through the dynamic ramifications of these effects for multilateral cooperation. Our results suggest that the emergence of regional free trade areas will be accompanied by a temporary retreat from liberal multilateral trade policies. Eventually, however, as the full impact of the emerging free trade agreement on multilateral trade patterns is felt, the initial balance between current and expected future conditions tends to reemerge, and liberal multilateral trade policies can be restored.

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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 9410001.

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Date of creation: 17 Oct 1994
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Handle: RePEc:wpa:wuwpit:9410001

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  1. Kyle Bagwell & Robert W. Staiger, 1993. "Miltilateral Tariff Cooperation During the Formation of Customs Unions," Discussion Papers 1070, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  3. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
  4. Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc.
  5. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
  6. 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.
  7. Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
  8. Rodney D. Ludema, 1998. "On the Value of Preferential Trade Agreements in Multilateral Negotiations," International Trade 9802003, EconWPA.
  9. Bond, E.W. & Syropoulos, C., 1993. "Optimality and Stability of Regional Trading Blocs," Papers 5-93-2, Pennsylvania State - Department of Economics.
  10. Paul Krugman, 1991. "The move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
  11. Anne O. Krueger, 1993. "Free Trade Agreements as Protectionist Devices: Rules of Origin," NBER Working Papers 4352, National Bureau of Economic Research, Inc.
  12. Riezman, Raymond, 1985. "Customs unions and the core," Journal of International Economics, Elsevier, vol. 19(3-4), pages 355-365, November.
  13. Kowalczyk, Carsten & Sjostrom, Tomas, 1994. "Bringing GATT into the Core," Economica, London School of Economics and Political Science, vol. 61(243), pages 301-17, August.
  14. 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.
  15. Stern, R.M. & Deardorff, A.V., 1992. "Multilateral Trade Negociations and Preferential Trading Arrangements," Working Papers 307, Research Seminar in International Economics, University of Michigan.
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