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Multilateralism and the endogenous formation of PTAs

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  • Caroline L. Freund

Abstract

This paper examines the interaction between preferential trade agreements (PTAs) and multilateral tariff reduction in a model of imperfect competition. A growing literature finds that the formation of PTAs alters the incentives for and the sustainability of multilateral tariff reduction. We show that the causation is not one-sided -- multilateral tariff reduction also affects the formation of PTAs. Specifically, tariff reduction enhances the incentives to form a PTA and increases the likelihood that it is self-enforcing. Thus, each round of multilateral tariff reduction should lead to a new wave of PTAs. This may help to explain the current trend towards regionalism.

Suggested Citation

  • Caroline L. Freund, 1998. "Multilateralism and the endogenous formation of PTAs," International Finance Discussion Papers 614, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:614
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/614/default.htm
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    References listed on IDEAS

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    5. 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.
    6. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-795, September.
    7. Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Paper 517, Economics Department, Queen's University.
    8. John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 5, pages 53-66, World Scientific Publishing Co. Pte. Ltd..
    9. Martin Richardson, 2017. "Endogenous Protection and Trade Diversion," World Scientific Book Chapters, in: Dimensions of Trade Policy, chapter 5, pages 107-127, World Scientific Publishing Co. Pte. Ltd..
    10. Richard Baldwin, 1993. "A Domino Theory of Regionalism," NBER Working Papers 4465, National Bureau of Economic Research, Inc.
    11. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December.
    12. Bond, E.W. & Syropoulos, C., 1993. "Trading Blocs and the Sustainability of Inte-regional Cooperation," Papers 5-93-3, Pennsylvania State - Department of Economics.
    13. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-519, September.
    14. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
    15. Kyle Bagwell & Robert W. Staiger, 1999. "Regionalism and Multilateral Tariff Co-operation," International Economic Association Series, in: John Piggott & Alan Woodland (ed.), International Trade Policy and the Pacific Rim, chapter 7, pages 157-190, Palgrave Macmillan.
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    Cited by:

    1. Calvo-Pardo, Hector & Freund, Caroline & Ornelas, Emanuel, 2009. "The ASEAN Free Trade Agreement: impact on trade flows and external trade barriers," LSE Research Online Documents on Economics 28602, London School of Economics and Political Science, LSE Library.
    2. Clarete, Ramon L., 2004. "Integration Options of ASEAN Transition Economies," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), vol. 1(2), pages 1-16, December.
    3. Antoni Estevadeordal & Caroline Freund & Emanuel Ornelas, 2008. "Does Regionalism Affect Trade Liberalization Toward Nonmembers?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1531-1575.
    4. Jaime MELO DE, 2005. "Regionalism and Developing Countries: A Primer," Working Papers 200510, CERDI.

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    Keywords

    International trade; Tariff;

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