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Why are Trade Agreements Regional?

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  • Ben Zissimos

Abstract

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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  • Ben Zissimos, 2011. "Why are Trade Agreements Regional?," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 32-45, February.
    • Handle: RePEc:bla:reviec:v:19:y:2011:i:1:p:32-45
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    Cited by:

    1. Emanuel Ornelas, 2012. "Preferential Trade Agreements and the Labor Market," CEP Discussion Papers dp1117, Centre for Economic Performance, LSE.
    2. 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.
    3. Yanase, Akihiko & Tsubuku, Masafumi, 2022. "Trade costs and free trade agreements: Implications for tariff complementarity and welfare," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 23-37.
    4. 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.
    5. Christian Soegaard, 2011. "The Self-enforceability of Trade Agreements in the Presence of Trade Costs," Discussion Papers 11/26, University of Nottingham, GEP.
    6. repec:ilo:ilowps:469183 is not listed on IDEAS
    7. Ben Zissimos, 2011. "Why are Trade Agreements Regional?," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 32-45, February.
    8. repec:smu:ecowpa:1403 is not listed on IDEAS
    9. Scott L. Baier & Jeffrey H. Bergstrand & Peter Egger & Patrick A. McLaughlin, 2008. "Do Economic Integration Agreements Actually Work? Issues in Understanding the Causes and Consequences of the Growth of Regionalism," The World Economy, Wiley Blackwell, vol. 31(4), pages 461-497, April.
    10. Soegaard, Christian, 2013. "An Oligopolistic Theory of Regional Trade Agreements," The Warwick Economics Research Paper Series (TWERPS) 1007, University of Warwick, Department of Economics.
    11. Baier, Scott L; Bergstrand, Jeffery H; Mariutto, Roland., 2010. "The Growth of Bilateralism," CAGE Online Working Paper Series 12, Competitive Advantage in the Global Economy (CAGE).
    12. Hinnerk Gnutzmann & Arevik Gnutzmann‐Mkrtchyan, 2019. "The silent success of customs unions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 178-224, February.

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    More about this item

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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