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Why Are Trade Agreements Regional? A Theory based on Noncooperative Networks

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  • Zissimos, Ben

Abstract

This paper argues that free trade agreements (FTAs) are regional because, in their absence, optimal tari¤s are higher against (close) regional partners than (distant) countries outside the region. Optimal tari¤s shift rents from foreign firms to domestic citizens. Lower transport costs imply higher rents and therefore higher tari¤s. So regional FTAs have a higher payo¤ than non-regional FTAs. Therefore, only regional FTAs may yield positive gains when sponsoring a FTA is costly. To analyze equilibrium, standard theory of non-cooperative networks is extended to allow for asymmetric players. Naive best response dynamics show that ‘trade blocks can be stepping blocks’ for free trade.

Suggested Citation

  • Zissimos, Ben, 2002. "Why Are Trade Agreements Regional? A Theory based on Noncooperative Networks," Economic Research Papers 269465, University of Warwick - Department of Economics.
  • Handle: RePEc:ags:uwarer:269465
    DOI: 10.22004/ag.econ.269465
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    References listed on IDEAS

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    More about this item

    Keywords

    Agricultural and Food Policy; International Relations/Trade;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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