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Preferential Trade And Welfare With Differentiated Products

  • Denise Konan

    ()

    (University of Hawaii)

  • Keith E. Maskus

    ()

    (Department of Economics, University of Colorado at Boulder)

We consider analytically and numerically the welfare tradeoffs inherent in a preferential trade area (PTA) with products differentiated by region of origin. For a small open economy in such a setting, welfare gains are associated with higher trade volumes within the PTA. However, welfare losses are induced by declining tariff revenues on trade with nonmember countries. We show that both effects are concave, while one is a non-monotonic and the other a potentially non-monotonic function of pre-PTA partner trade shares. Therefore, the relationship between initial partner import shares and direct static welfare impacts of a PTA are theoretically ambiguous. This finding contrasts with conventional results in the homogeneous-goods case, whereby the smaller is the pre-agreement trade volume with a potential partner the more beneficial is a PTA.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_11-1.pdf
File Function: First version, 2011
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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201101.

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Length: 20 pages
Date of creation: 14 Feb 2011
Date of revision:
Handle: RePEc:hai:wpaper:201101
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  1. Riezman, Raymond, 1979. "A 3 x 3 model of customs unions," Journal of International Economics, Elsevier, vol. 9(3), pages 341-354, August.
  2. Bond, Eric W. & Riezman, Raymond G. & Syropoulos, Constantinos, 2004. "A strategic and welfare theoretic analysis of free trade areas," Journal of International Economics, Elsevier, vol. 64(1), pages 1-27, October.
  3. Chen, Maggie & Joshi, Sumit, 2010. "Third-Country Effects on the Formation of Free Trade Agreements," MPRA Paper 23507, University Library of Munich, Germany.
  4. Taiji Furusawa & Hideo Konishi, 2002. "Free Trade Networks," Boston College Working Papers in Economics 548, Boston College Department of Economics, revised 08 Sep 2003.
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