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

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  • Kamal Saggi
  • Alan Woodland
  • Halis Murat Yildiz

Abstract

This paper compares equilibrium outcomes of two games of trade liberalization. In the Bilateralism game, countries choose whether to liberalize trade preferentially via a customs union (CU ), multilaterally, or not at all. The Multilateralism game is a restricted version of the Bilateralism game in that countries cannot form CUs and can only undertake non-discriminatory trade liberalization. When countries have symmetric endowments, global free trade is the only stable equilibrium of both games. Allowing for endowment asymmetry, we isolate circumstances where the option to form CUs helps further the cause of multilateral liberalization as well as where it does not. (JEL F12, F13)

Suggested Citation

  • Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2013. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," American Economic Journal: Microeconomics, American Economic Association, vol. 5(1), pages 63-99, February.
  • Handle: RePEc:aea:aejmic:v:5:y:2013:i:1:p:63-99
    Note: DOI: 10.1257/mic.5.1.63
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. James Lake & Moïse Nken & Halis Murat Yildiz, 2019. "Tariff Bindings and the Dynamic Formation of Preferential Trade Agreements," CESifo Working Paper Series 7712, CESifo Group Munich.
    2. Moise Nken & Halis Murat Yildiz, 2017. "Implications of multilateral tariff bindings on the formation of preferential trade agreements and quest for global free trade," Working Papers 068, Ryerson University, Department of Economics.
    3. Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2018. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 10, pages 223-237, World Scientific Publishing Co. Pte. Ltd..
    4. Gene M. Grossman, 2016. "The Purpose of Trade Agreements," NBER Working Papers 22070, National Bureau of Economic Research, Inc.
    5. Kyle Bagwell & Robert W. Staiger & Ali Yurukoglu, 2017. ""Nash-in-Nash" Tariff Bargaining with and without MFN," NBER Working Papers 23894, National Bureau of Economic Research, Inc.
    6. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    7. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," MPRA Paper 76330, University Library of Munich, Germany.
    8. Paul Missios & Halis Murat Yildiz, 2017. "Do SouthSouth preferential trade agreements undermine the prospects for multilateral free trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 50(1), pages 111-161, February.
    9. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2019. "Should the WTO require free trade agreements to eliminate internal tariffs?," Journal of International Economics, Elsevier, vol. 118(C), pages 316-330.
    10. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    11. Hinnerk Gnutzmann & Arevik Gnutzmann-Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 178-224, February.
    12. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    13. Lake, James & Nken, Moïse & Yildiz, Halis Murat, 2020. "Tariff bindings and the dynamic formation of Preferential Trade Agreements," Journal of International Economics, Elsevier, vol. 122(C).
    14. James Lake, 2016. "Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility," Departmental Working Papers 1601, Southern Methodist University, Department of Economics.
    15. repec:smu:ecowpa:1403 is not listed on IDEAS
    16. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 317-390, Elsevier.
    17. 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, vol. 10(3), pages 375-387, July.
    18. Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2020. "The Role of Non-Discrimination in a World of Discriminatory Preferential Trade Agreements," CESifo Working Paper Series 8139, CESifo Group Munich.
    19. James Lake, 2017. "Free Trade Agreements As Dynamic Farsighted Networks," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 31-50, January.
    20. May, D. & McCorriston, S., 2018. "The role of Centrality in Preventing Free Trade of Processed Agricultural Goods under Imperfect Competition," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277262, International Association of Agricultural Economists.
    21. Halis Murat Yildiz, 2014. "Hub and spoke trade agreements under oligopoly with asymmetric costs," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(1), pages 97-110, February.
    22. Bagwell, Kyle & Staiger, Robert W. & Yurukoglu, Ali, 2020. "“Nash-in-Nash” tariff bargaining," Journal of International Economics, Elsevier, vol. 122(C).
    23. Judit Fabian, 2020. "Preferential Trade Agreements Vs. Multilateralism: In The New Trump-World, Does Canada Face An Impossible Choice?," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 13(2), March.
    24. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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