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Can Bilateral Trade Agreements Help Induce Free Trade?

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Author Info

  • Raymond Riezman

    (University of Iowa)

Abstract

There has been growing debate about whether bilateral trade agreements are damaging multilateral efforts to eliminate barriers to international trade. This paper develops a model in which trading blocks always charge optimal tariffs and make trade agreements based on strategic considerations. We ask a very simple question. Does the fact that trading blocks can form bilateral trade agreements make Free trade less likely to occur? The answer is that it depends on the size distribution of the trading blocks. If there is one large trading block along with some smaller ones then bilateral trade agreements allow the smaller trading blocks to coalesce and block the monopoly power of large trading blocks. In this case, bilateral trade agreements facilitate the attainment of free trade. Not allowing customs unions leads to more not less protection. If trading blocks are of roughly equivalent size then bilateral trade agreements allow groups of trading blocks to more effectively monopolize world trade in which case they may make free trade less likely. These results suggest that a policy which inhibits the formation of trading blocks may be harmful. We also compute the welfare effects of trade agreements to get some idea of how empirically important these issues are.

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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 9706001.

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Length: 23 pages
Date of creation: 02 Jun 1997
Date of revision:
Handle: RePEc:wpa:wuwpit:9706001

Note: Type of Document - MS Word; prepared on IBM PC; pages: 23 ; figures: included
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Web page: http://128.118.178.162

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References

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  1. Jeffrey A. Frankel, Ernesto Stein, and Shang-Jin Wei., 1996. "Regional Trading Arrangements: Natural or Super-Natural?," Center for International and Development Economics Research (CIDER) Working Papers C96-059, University of California at Berkeley.
  2. 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.
  3. 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.
  4. Gatsios, Konstantine & Karp, Larry, 1989. "Delegation Games in Customs Unions," CEPR Discussion Papers 337, C.E.P.R. Discussion Papers.
  5. Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
  6. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
  7. 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.
  8. Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
  9. 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.
  10. Haverman, J.D., 1993. "Some Welfare Effects of Dynamic Customs Union Formation," Papers 93-109, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  11. repec:fth:coluec:9596-04 is not listed on IDEAS
  12. Jon D. Haveman, 1996. "Some Welfare Effects of Sequential Customs Union Formation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 941-58, November.
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Citations

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Cited by:
  1. Monika Mrazova & David Vines & Ben Zissimos, 2009. "Is the WTO's Article XXIV Bad?," Vanderbilt University Department of Economics Working Papers 0902, Vanderbilt University Department of Economics.
  2. Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2011. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," Vanderbilt University Department of Economics Working Papers 1116, Vanderbilt University Department of Economics.
  3. Baldwin, Richard & Jaimovich, Dany, 2012. "Are Free Trade Agreements contagious?," Journal of International Economics, Elsevier, vol. 88(1), pages 1-16.
  4. Lisandro Abrego & Raymond Riezman & John Whalley, 2002. "How Often Are Propositions On The Effects Of Regional Trade Agreements Theoretical Curiosa And When Should They Guide Policy?," UWO Department of Economics Working Papers 20024, University of Western Ontario, Department of Economics.
  5. Baldwin, Richard, 2008. "Big-Think Regionalism: a Critical Survey," CEPR Discussion Papers 6874, C.E.P.R. Discussion Papers.
  6. Abrego, Lisandro & Riezman, Raymond & Whalley, John, 2006. "How often are propositions on the effects of regional trade agreements theoretical curiosa?," Journal of International Economics, Elsevier, vol. 68(1), pages 59-78, January.
  7. Melatos, Mark & Woodland, Alan, 2007. "Endogenous trade bloc formation in an asymmetric world," European Economic Review, Elsevier, vol. 51(4), pages 901-924, May.
  8. Ben Zissimos, 2011. "Why are Trade Agreements Regional?," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 32-45, 02.
  9. Carsten Kowalczyk & Raymond Riezman, 2009. "Trade Agreements," CESifo Working Paper Series 2660, CESifo Group Munich.
  10. M. Ayhan Kose & Raymond Riezman, 2000. "Small Countries and Preferential Trade Agreements "How Severe is the Innocent Bystander Problem?"," CESifo Working Paper Series 253, CESifo Group Munich.
  11. Saggi, Kamal & Yildiz, Halis Murat, 2010. "Bilateralism, multilateralism, and the quest for global free trade," Journal of International Economics, Elsevier, vol. 81(1), pages 26-37, May.
  12. Emanuel Ornelas, 2000. "Free Trade Areas with Politically Active Oligopolies," Econometric Society World Congress 2000 Contributed Papers 1457, Econometric Society.
  13. Mrázová, Monika & Vines, David & Zissimos, Ben, 2013. "Is the GATT/WTO's Article XXIV bad?," Journal of International Economics, Elsevier, vol. 89(1), pages 216-232.

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