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Gradualism in free trade agreements: a theoretical justification

  • Chisik, Richard

A notable feature of many recent trade agreements is the gradual, rather than immediate, reduction of trade barriers. In this paper we model trade liberalization as a cooperative relationship that evolves gradually in a non-cooperative environment. We show that specialization, capacity irreversibility and the development of trade-partner specific capital increase the benefit of continuing the liberalizing relationship and decrease, over time, the lowest obtainable self-enforcing tariff. By increasing the penalty of future defection, sunk costs ensure that the self-enforcing trading relationship starts slowly, but once in progress the level of cooperation continues to improve.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 59 (2003)
Issue (Month): 2 (March)
Pages: 367-397

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Handle: RePEc:eee:inecon:v:59:y:2003:i:2:p:367-397
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