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

  • Jorzik, Nathalie
  • Mueller-Langer, Frank

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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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
Date of revision:
Handle: RePEc:lmu:muenec:14587
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  1. Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. repec:tpr:qjecon:v:113:y:1998:i:1:p:227-250 is not listed on IDEAS
  3. Richard Baldwin, 2007. "Multilateralising Regionalism: Sphagetti Bowls as building Blocs on the Path to Global Free Trade," Working Papers id:1231, eSocialSciences.
  4. 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.
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  7. 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.
  8. 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.
  9. Taiji Furusawa & Hideo Konishi, 2003. "Free Trade Networks," Working Papers 2003.55, Fondazione Eni Enrico Mattei.
  10. Durieu, Jacques & Haller, Hans & Solal, Philippe, 2005. "Interaction on Hypergraphs," Sonderforschungsbereich 504 Publications 05-34, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  11. Saggi, Kamal & Yildiz, Halis Murat, 2008. "Bilateral trade agreements and the feasibility of multilateral free trade," MPRA Paper 17561, University Library of Munich, Germany, revised 26 Jun 2009.
  12. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
  13. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
  14. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
  15. Richard E. Baldwin, 2011. "Multilateralising Regionalism: Spaghetti Bowls as Building Blocks on the Path to Global Free Trade," Chapters, in: International Handbook on the Economics of Integration, Volume I, chapter 2 Edward Elgar.
  16. 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.
  17. 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.
  18. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
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