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A strategic and welfare theoretic analysis of free trade areas

In: International Trade Agreements and Political Economy

Author

Listed:
  • Eric W. Bond

    (Department of Economics, Pennsylvania State University, University Park, PA 16802, USA)

  • Raymond G. Riezman

    (Deparrment of Economics, W360 PBB. University of Iowa, Iowa City, IA 52242, USA)

  • Constantinos Syropoulos

    (Department of Economics, Florida International University, University Park, DM-321, Miami, FL 33199, USA)

Abstract

We construct a three-country model to determine how the formation of free trade areas (FTAs) affects optimal tariffs and welfare. We find that, at constant rest of the world (ROW) tariffs, the adoption of internal free trade induces union members to reduce their external tariffs below the Kemp-Wan [J. Int. Econom. 6 (1976) 95-97] level, and causes ROW's terms of trade to improve and its welfare to rise. When ROW also behaves optimally, its policy response to the formation of the FTA is to raise tariffs. Generally, FTA members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large. We also demonstrate how FTAs may undermine the attainment of global free trade.

Suggested Citation

  • Eric W. Bond & Raymond G. Riezman & Constantinos Syropoulos, 2013. "A strategic and welfare theoretic analysis of free trade areas," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 8, pages 101-127, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814390125_0008
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    JEL classification:

    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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