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Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis


  • Demet Yilmazkuday

    () (Department of Economics, Florida International University)

  • Hakan Yilmazkuday

    () (Department of Economics, Florida International University)


Why do we observe proliferation of bilateral free trade agreements (FTAs) between certain types of countries instead of having progress in attaining global free trade through a multilateral FTA? We answer this question by exploring the enforceability of di¡èerent types of FTAs through comparing minimum discount factors that are necessary to sustain them in an in?nitely repeated game framework. We also search for the globally welfare maximizing trade agreements that are sustainable under different conditions. The results depict that transportation costs, differences in country sizes and comparative advantages are all obstacles for having a multilateral FTA. Accordingly, international development policies conducted for the removal of such obstacles should be the main goal toward achieving a multilateral FTA, which we show to be the ?rst-best solution to the maximization problem of global welfare.

Suggested Citation

  • Demet Yilmazkuday & Hakan Yilmazkuday, 2014. "Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis," Working Papers 1401, Florida International University, Department of Economics.
  • Handle: RePEc:fiu:wpaper:1401

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    References listed on IDEAS

    1. Bagwell, Kyle & Staiger, Robert W., 1997. "Multilateral tariff cooperation during the formation of customs unions," Journal of International Economics, Elsevier, vol. 42(1-2), pages 91-123, February.
    2. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
    3. Bond, Eric W. & Syropoulos, Constantinos & Winters, L. Alan, 2001. "Deepening of regional integration and multilateral trade agreements," Journal of International Economics, Elsevier, vol. 53(2), pages 335-361, April.
    4. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, vol. 100(5), pages 2093-2124, December.
    5. Saggi, Kamal & Yildiz, Halis Murat, 2010. "Bilateralism, multilateralism, and the quest for global free trade," Journal of International Economics, Elsevier, vol. 81(1), pages 26-37, May.
    6. Arvind Panagariya & Jagdish Bhagwati, 1996. "The Economics of Preferential Trade Agreements," Books, American Enterprise Institute, number 51856, September.
    7. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
    8. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
    9. Arvind Panagariya, 1998. "Do transport costs justifyregional preferential trading arrangements? no," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(2), pages 280-301, June.
    10. Eric W. Bond & Jee-Hyeong Park, 2002. "Gradualism in Trade Agreements with Asymmetric Countries," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 379-406.
    11. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    12. Wonnacott, Paul & Wonnacott, Ronald, 1981. "Is Unilateral Tariff Reduction Preferable to a Customs Union? The Curious Case of the Missing Foreign Tariffs," American Economic Review, American Economic Association, vol. 71(4), pages 704-714, September.
    13. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
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    1. Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis
      by Hakan Yilmazkuday in Hakan Yilmazkuday's Blog on 2016-12-15 07:32:00


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    Cited by:

    1. Hou, Yulin & Wang, Yun & Yilmazkuday, Hakan, 2017. "Gravity Channels in Trade," Globalization and Monetary Policy Institute Working Paper 297, Federal Reserve Bank of Dallas.

    More about this item


    Free Trade Agreements; Self-Enforcing Rules; Transportation Costs; Country Size; Comparative Advantage; Repeated Game;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D60 - Microeconomics - - Welfare Economics - - - General
    • F15 - International Economics - - Trade - - - Economic Integration

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