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Free Trade Networks

  • Taiji Furusawa

    (International Graduate School of Social Science, Yokohama National University, Japan)

  • Hideo Konishi

    (Department of Economics, Boston College, USA)

The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider a general n-country model in which countries trade differentiated industrial commodities as well as a numeraire good. Countries may be different in the size of the industrial good industry (measure of firms) and the market size (population size). Their incentives to sign an FTA depend on these characteristics of their own countries and those of their partner countries. We show that if all countries are symmetric, a complete global free trade network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitate global trade liberalization, emphasizing the fact that unlike in the case of a CU, each country signing an FTA can have a new FTA with an outside country without consent of other member countries.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.55.

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Date of creation: Jun 2003
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Handle: RePEc:fem:femwpa:2003.55
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