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Why are Trade Agreements Regional?

This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries, a familiar problem of coordination failure arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 19 (2011)
Issue (Month): 1 (02)
Pages: 32-45

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Handle: RePEc:bla:reviec:v:19:y:2011:i:1:p:32-45
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576

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