How Does Uncertainty Affect the Choice of Trade AgreementsF
AbstractThis paper analyzes how uncertainty and the timing of its resolution infuence the formation and design of regional trade agreements. Two sources of uncertainty — in demand and costs — are considered. We compare the case in which uncertainty is resolved “early” (before tariffs are chosen), with the case in which uncertainty is resolved “late” (after tariffs are chosen). These cases are, in turn, compared with the benchmark case of no uncertainty. We demonstrate that, as long as some decisions are made after uncertainty is resolved, trade agreements have option values. These option values differ across agreements, reFecting members’ different degrees of (trade policy) freedom to respond to changes in the trading environment. Moreover, these option values may be sufficiently large as to lead prospective members to opt for a more Fexible trading arrangement(such as a free trade area) over a less Fexible agreement (such as a customs union). Indeed, countries may even prefer to stand alone than join a free trade area under some circumstances. Finally, we show that the timing of the resolution of uncertainty can signiFcantly impact the type of trade agreement that countries wish to form.
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Bibliographic InfoPaper provided by York University, Department of Economics in its series Working Papers with number 2012_1.
Length: 27 pages
Date of creation: 17 Apr 2012
Date of revision:
Trade Agreement; Free Trade Area; Customs Union; Uncertainty; Resolution of Uncertainty;
Other versions of this item:
- Appelbaum, Elie & Melatos, Mark, 2012. "How Does Uncertainty Affect the Choice of Trade Agreements?," Working Papers 2012-08, University of Sydney, School of Economics.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F15 - International Economics - - Trade - - - Economic Integration
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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