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Trade costs and free trade agreements: Implications for tariff complementarity and welfare

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  • Yanase, Akihiko
  • Tsubuku, Masafumi

Abstract

This paper develops a three-country model of intra-industry trade under imperfect competition with trade costs between countries to examine the effects of a free trade agreement (FTA). Under sufficiently high trade costs, FTA member countries might have an incentive to set optimal external tariffs that are higher than the pre-FTA optimal tariffs (i.e., the tariff complementarity effect may not exist) and the formation of an FTA may worsen the non-member country’s welfare. Whether the member countries benefit from the FTA depends on the trade costs and the degree of substitutability among differentiated goods.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:reveco:v:78:y:2022:i:c:p:23-37
    DOI: 10.1016/j.iref.2021.10.012
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    More about this item

    Keywords

    Trade costs; Free trade agreement; Tariff complementarity effect; Welfare;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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