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Dynamic formation of preferential trade agreements: The role of flexibility

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  • James Lake

Abstract

In practice, free trade agreements (FTAs) vastly outnumber customs unions (CUs). Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs: individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. I show how the relative prevalence of FTAs versus CUs depends on the structure of market size asymmetry across countries and use these predictions to shed some light on FTA versus CU formation in Europe and South America.

Suggested Citation

  • James Lake, 2019. "Dynamic formation of preferential trade agreements: The role of flexibility," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 132-177, February.
  • Handle: RePEc:cje:issued:v:52:y:2019:i:1:p:132-177
    DOI: 10.1111/caje.12368
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    Cited by:

    1. 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).
    2. 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.
    3. Martin Richardson, 2021. "An elementary tariff reform for a free trade area," ANU Working Papers in Economics and Econometrics 2021-680, Australian National University, College of Business and Economics, School of Economics.
    4. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    5. Martin Richardson, 2023. "An Elementary Tariff Reform for a Free Trade Area," Foreign Trade Review, , vol. 58(1), pages 38-44, February.
    6. Appelbaum, Elie & Melatos, Mark, 2021. "Preferential Trade Agreements as Insurance," Working Papers 2021-04, University of Sydney, School of Economics.

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    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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