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Why do countries pursue bilateral trade agreements: a case study of North America

  • Michael A. Kouparitsas

Current trade theory argues that countries pursue bilateral trade agreements to escape from a terms-of-trade driven prisoners' dilemma. This paper offers an empirical test of the theory. Using simulation results from a quantitative trade model of North America I show that the non-cooperative and cooperative payoffs implicit in the CFTA and NAFTA take on the two essential elements of a prisoners' dilemma. First, my results suggest that irrespective of county size unilateral liberalization makes the liberalizing country worse off, while making its regional trading partner better off. Next, I show that cooperative bilateral agreements make both liberalizing partners better off.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Macroeconomic Issues with number WP-97-20.

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Date of creation: 1997
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Handle: RePEc:fip:fedhma:wp-97-20
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  1. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
  2. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  3. David Lipton & James M. Poterba & Jeffrey Sachs & Lawrence H. Summers, 1983. "Multiple Shooting in Rational Expectations Models," NBER Technical Working Papers 0003, National Bureau of Economic Research, Inc.
  4. Baxter, Marianne, 1992. "Fiscal Policy, Specialization, and Trade in the Two-Sector Model: The Return of Ricardo?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 713-44, August.
  5. McKibbin, Warwick J. & Wilcoxen, Peter J., 1998. "The theoretical and empirical structure of the G-Cubed model," Economic Modelling, Elsevier, vol. 16(1), pages 123-148, January.
  6. Feenstra, R.C., 1995. "Estimating the Effects of Trade Policy," Papers 95-10, California Davis - Institute of Governmental Affairs.
  7. Bagwell, Kyle & Staiger, Robert W, 1998. "Will Preferential Agreements Undermine the Multilateral Trading System?," Economic Journal, Royal Economic Society, vol. 108(449), pages 1162-82, July.
  8. Brown, D.K. & Deardorff, A.V. & Stern, R.M., 1991. "A North American Free Trade Agreement: Analytical Issues and A Computational Assessment," Working Papers 289, Research Seminar in International Economics, University of Michigan.
  9. Mendoza, Enrique G & Tesar, Linda L, 1998. "The International Ramifications of Tax Reforms: Supply-Side Economics in a Global Economy," American Economic Review, American Economic Association, vol. 88(1), pages 226-45, March.
  10. J. David Richardson & Lionel Olmer & Paula Stern, 1994. "Trade Policy," NBER Chapters, in: American Economic Policy in the 1980s, pages 627-690 National Bureau of Economic Research, Inc.
  11. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," Working Papers 93-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  12. repec:cup:cbooks:9780521319867 is not listed on IDEAS
  13. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  14. Michael A. Kouparitsas, 1998. "Dynamic trade liberalization analysis: steady state, transitional and inter-industry effects," Working Paper Series WP-98-15, Federal Reserve Bank of Chicago.
  15. Clinton R. Shiells & Kenneth A. Reinert, 1993. "Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 299-316, May.
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