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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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