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Networks of free trade agreements among heterogeneous countries

  • MAULEON, Ana
  • SONG, Huasheng
  • VANNETELBOSCH, Vincent

The paper examines the formation of free trade agreements as a network formation game. We consider a three-country model in which international trade occurs between economies with imperfectly competitive product markets. Labor markets can be unionized and non-unionized in each country. We show that if all countries are of the same type (all of them are either unionized or non-unionized), the global free trade network is both the unique pairwise stable network and the unique efficient network. If some countries are unionized while others are non-unionized, other networks apart from the global free trade network are likely to be pairwise stable. However, the efficient network is always the global free trade network. Thus, a conflict between stability and efficiency may occur. Moreover, starting from the network in which no country has signed a free trade agreement, all sequences of networks due to continuously profitable deviations do not lead (in most cases) to the global free trade network, even when global free trade is stable.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006053.

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Date of creation: 00 Jun 2006
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Handle: RePEc:cor:louvco:2006053
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  1. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  2. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  3. Taiji Furusawa & Hideo Konishi, 2003. "Free Trade Networks," Working Papers 2003.55, Fondazione Eni Enrico Mattei.
  4. John Kennan & Raymond Riezman, 1990. "Optimal Tariff Equilibria with Customs Unions," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 70-83, February.
  5. Won Chang & L. Alan Winters, 2002. "How Regional Blocs Affect Excluded Countries: The Price Effects of MERCOSUR," American Economic Review, American Economic Association, vol. 92(4), pages 889-904, September.
  6. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December.
  7. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
  8. Tito Cordella, 1990. "Trade Liberalizaiton and Oligopolistic Industries: a Welfare Appraisal," Working Papers 100, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. MAULEON, Ana & VANNETELBOSCH, Vincent, . "Strategic union delegation and strike activity," CORE Discussion Papers RP -1766, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Goyal, S. & Joshi, S., 1999. "Bilateralism and free trade," Econometric Institute Research Papers EI 9953-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  11. Huizinga, H.P., 1993. "International market integration and union wage bargaining," Other publications TiSEM 567712dd-8f03-40d8-8428-c, Tilburg University, School of Economics and Management.
  12. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
  14. Stephen R. G. Jones, 1989. "The Role of Negotiators in Union-Firm Bargaining," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 630-42, August.
  15. HERINGS, Jean-Jacques & MAULEON, Ana & ANNETELBOSCH, Vincent J., . "Rationalizability for social environments," CORE Discussion Papers RP -1718, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. repec:ner:tilbur:urn:nbn:nl:ui:12-155144 is not listed on IDEAS
  17. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
  18. Fritz GRAFE & Ana MAULEON, 2000. "Externalities and Free Trade Agreements," Annales d'Economie et de Statistique, ENSAE, issue 59, pages 63-88.
  19. Paul Belleflamme & Francis Bloch, 2001. "Market Sharing Agreements and Collusive Networks," Working Papers 443, Queen Mary University of London, School of Economics and Finance.
  20. ANDERSON, Simon P. & DONSIMONI, Marie-Paule & GABSZEWICZ, Jean J., . "Is international trade profitable to oligopolistic industries?," CORE Discussion Papers RP -865, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  21. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October.
  22. Naylor, Robin, 1998. "International trade and economic integration when labour markets are generally unionised," European Economic Review, Elsevier, vol. 42(7), pages 1251-1267, July.
  23. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
  24. Matthew O. Jackson, 2002. "The Stability and Efficiency of Economic and Social Networks," Microeconomics 0211011, EconWPA.
  25. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
  26. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  27. de Melo, Jaime & Montenegro, Claudio & Panagariya, Arvind, 1992. "Regional integration, old and new," Policy Research Working Paper Series 985, The World Bank.
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