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Multilateral Stability and Efficiency of Trade Agreements: A Network Formation Approach

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  • Jorzik, Nathalie
  • Mueller-Langer, Frank

Abstract

We study the endogenous network formation of bilateral and multilateral trade agreements by means of hypergraphs and introduce the equilibrium concept of multilateral stability. We consider multi-country settings with a firm in each country that produces a homogeneous good and competes as a Cournot oligopolist in each market. Under endogenous tariffs, we find that the existence of a multilateral trade agreement is always necessary for the stability of the trading system and that the formation of preferential trade agreements is always necessary for achieving global free trade. We also find that global free trade is efficient but not necessarily the only multilaterally stable trade equilibrium when countries are symmetric (heterogeneous) in terms of market size. We derive conditions under which such a conflict between overall welfare efficiency and stability occurs.

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File URL: http://epub.ub.uni-muenchen.de/14587/1/LMU_%20WP_Reihe_Jorzik%20and%20Mueller%20Langer_Multilateral%20Stability%20and%20Efficiency%20of%20Trade%20Agreements_2013.pdf
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 14587.

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Date of creation: Feb 2013
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Handle: RePEc:lmu:muenec:14587
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Keywords: Preferential trade; multilateral trade agreements; multilateral stability; GATT; network formation;

Find related papers by JEL classification:

  • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
  • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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  1. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
  2. Frank Mueller‐Langer, 2012. "Parallel Trade and its Ambiguous Effects on Global Welfare," Review of International Economics, Wiley Blackwell, vol. 20(1), pages 177-185, 02.
  3. Taiji Furusawa & Hideo Konishi, 2002. "Free Trade Networks," Boston College Working Papers in Economics 548, Boston College Department of Economics, revised 08 Sep 2003.
  4. Monika Mrazova & David Vines & Ben Zissimos, 2009. "Is the WTO's Article XXIV Bad?," Vanderbilt University Department of Economics Working Papers 0902, Vanderbilt University Department of Economics.
  5. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
  6. Richard Baldwin, 2007. "Multilateralising Regionalism: Sphagetti Bowls as building Blocs on the Path to Global Free Trade," Working Papers id:1231, eSocialSciences.
  7. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
  8. Grossman, G.M. & Helpman, E., 1993. "The Politics of Free Trade Agreements," Papers 14-93, Tel Aviv.
  9. 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.
  10. Kamal Saggi & Halis Murat Yildiz, 2011. "Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade," Review of International Economics, Wiley Blackwell, vol. 19(2), pages 356-373, 05.
  11. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Sanjeev Goyal & Sumit Joshi, 2006. "Bilateralism And Free Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 749-778, 08.
  13. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
  14. Durieu, Jacques & Haller, Hans & Solal, Philippe, 2005. "Interaction on Hypergraphs," Sonderforschungsbereich 504 Publications 05-34, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  15. Mrázová, Monika & Vines, David & Zissimos, Ben, 2013. "Is the GATT/WTO's Article XXIV bad?," Journal of International Economics, Elsevier, vol. 89(1), pages 216-232.
  16. Bhagwati, Jagdish & Panagariya, Arvind, 1996. "The Theory of Preferential Trade Agreements: Historical Evolution and Current Trends," American Economic Review, American Economic Association, vol. 86(2), pages 82-87, May.
  17. 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.
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