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Should the WTO require free trade agreements to eliminate internal tariffs?

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  • Saggi, Kamal
  • Wong, Woan Foong
  • Yildiz, Halis Murat

Abstract

In a three-country model of endogenous free trade agreements (FTAs), we study the effects of requiring FTA members to eliminate tariffs on one another, as is essentially stipulated under current WTO rules. We explain why, in the absence of such a requirement, FTAs members impose positive tariffs on each other even when maximizing their joint welfare. We show that requiring FTA members to eliminate internal tariffs induces them to lower their external tariffs. Such external trade liberalization by FTA members undermines the prospects of global free trade since it reduces the non-member's incentive to enter into trade agreements with them.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:inecon:v:118:y:2019:i:c:p:316-330
    DOI: 10.1016/j.jinteco.2018.10.003
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    Cited by:

    1. Akira Okada & Yasuhiro Shirata, 2021. "The Formation of Global Free Trade Agreement," Papers 2103.16118, arXiv.org, revised Mar 2021.
    2. Lukaszuk, Piotr & Legge, Stefan, 2019. "Which Factors Determine the Utilization of Preferential Tariff Rates?," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203639, Verein für Socialpolitik / German Economic Association.
    3. Ornelas, Emanuel & Tovar, Patricia, 2021. "Intra-Bloc Tariffs and Preferential Margins in Trade Agreements," CEPR Discussion Papers 16464, C.E.P.R. Discussion Papers.
    4. Ornelas, Emanuel & Tovar, Patricia, 2021. "Intra-Bloc Tariffs and Preferential Margins in Trade Agreements," CEPR Discussion Papers 16464, C.E.P.R. Discussion Papers.
    5. 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.

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    More about this item

    Keywords

    Free trade agreements; Tariffs; Customs unions; World trade organization; Coalition proof Nash equilibrium; Welfare;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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