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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
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    References listed on IDEAS

    as
    1. Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
    2. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    3. Roger B. Myerson, 1977. "Graphs and Cooperation in Games," Mathematics of Operations Research, INFORMS, vol. 2(3), pages 225-229, August.
    4. repec:spr:compst:v:52:y:2000:i:1:p:39-56 is not listed on IDEAS
    5. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
    6. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
    7. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
    8. Bhagwati, Jagdish & Greenaway, David & Panagariya, Arvind, 1998. "Trading Preferentially: Theory and Policy," Economic Journal, Royal Economic Society, vol. 108(449), pages 1128-1148, July.
    9. Roger B. Myerson, 1976. "Graphs and Cooperation in Games," Discussion Papers 246, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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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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