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Regionalism and permanent diversion

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  • Caroline L. Freund

Abstract

We compare free trade reached through expanding regional trading blocks to free trade accomplished by multilateral negotiation. With sunk costs, the outcomes are different. Trade in an imperfectly competitive good flows disproportionately more between the original members of a regional agreement even after free trade is reached. They secure a higher welfare level from regionalism than from free trade achieved multilaterally; non-members, however, reach a lower welfare level. A surprising result is that world welfare during free trade is greater when it is achieved by the regional path. We conclude with some empirical evidence from the European Union that is consistent with the model.

Suggested Citation

  • Caroline L. Freund, 1998. "Regionalism and permanent diversion," International Finance Discussion Papers 602, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:602
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    Cited by:

    1. Tiiu Paas & Egle Tafenau, 2004. "The Baltic Sea Region’s Role in Trade Integration," University of Tartu - Faculty of Economics and Business Administration, in: Tiiu Paas & Egle Tafenau (ed.), Modelling the Economies of the Baltic Sea Region, edition 1, volume 17, chapter 3, pages 92-115, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    2. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
    3. Simeon Djankov & Caroline L. Freund, 1998. "Disintegration," International Finance Discussion Papers 618, Board of Governors of the Federal Reserve System (U.S.).

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