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The effects of cross-regional free trade agreements under a vertical industry structure

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  • Yasushi Kawabata

Abstract

This paper examines the effects of a cross-regional free trade agreement (FTA) on tariffs, welfare, and the incentives for multilateral free trade in a three-country model with a vertical industry structure. We show that the FTA induces member countries to reduce their tariffs on nonmember countries. On the other hand, a nonmember country lowers its tariff on final-good imports, but raises its tariff on intermediate-good imports. Also, the FTA makes member and nonmember countries better off. After the FTA is enacted, member and nonmember countries have an incentive to support multilateral free trade, so an FTA acts as a building block for multilateral trade liberalization.

Suggested Citation

  • Yasushi Kawabata, 2014. "The effects of cross-regional free trade agreements under a vertical industry structure," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(6), pages 906-922, September.
    • Handle: RePEc:taf:jitecd:v:23:y:2014:i:6:p:906-922
    DOI: 10.1080/09638199.2012.745587
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    References listed on IDEAS

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    1. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 8, pages 168-185, World Scientific Publishing Co. Pte. Ltd..
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    5. Kawabata, Yasushi & Yanase, Akihiko & Kurata, Hiroshi, 2010. "Vertical trade and free trade agreements," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 569-585, December.
    6. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateralism, multilateralism, and the quest for global free trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 7, pages 156-167, World Scientific Publishing Co. Pte. Ltd..
    7. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February.
    8. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
    9. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October.
    10. Oecd & Nea, 2011. "Bilateral and Multilateral Agreements," Nuclear Law Bulletin, OECD Publishing, vol. 2010(2), pages 93-106.
    11. Akihiko Yanase & Hiroshi Kurata & Yasushi Kawabata, 2012. "Free Trade Agreement and Vertical Trade with a Manufacturing Base," Review of International Economics, Wiley Blackwell, vol. 20(5), pages 1070-1081, November.
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    Cited by:

    1. Archana Srivastava & Somesh Kumar Mathur & Rachna Mathur & Prabir De, 2023. "Assessment of Possible Economic Alignment Between G20 Nations with Special Focus on India, G7 and G12: A General Equilibrium Analysis," India Quarterly: A Journal of International Affairs, , vol. 79(4), pages 535-551, December.
    2. Kawabata, Yasushi, 2015. "Endogenous formation of free trade agreements in vertically related markets," Research in Economics, Elsevier, vol. 69(2), pages 214-223.
    3. Huria, Sugandha, 2020. "Gains from Free Trade Agreements: A Theoretical Analysis," MPRA Paper 109815, University Library of Munich, Germany.

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