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

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Listed author(s):
  • 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: https://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
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. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
  2. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
  3. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
  4. 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 Publishing.
  5. David Vines & Monika Mrazova, 2008. "Is the WTO's Article XXIV Bad?," Economics Series Working Papers 417, University of Oxford, Department of Economics.
  6. Durieu, Jacques & Haller, Hans & Solal, Philippe, 2005. "Interaction on Hypergraphs," Sonderforschungsbereich 504 Publications 05-34, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  7. Grossman, Gene M & Helpman, Elhanan, 1995. "The Politics of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 85(4), pages 667-690, September.
  8. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  9. 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.
  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. Durieu, Jacques & Haller, Hans & Solal, Philippe, 2005. "Interaction on hypergraphs," Papers 05-34, Sonderforschungsbreich 504.
  12. Bagwell, Kyle & Staiger, Robert W, 1998. "Will Preferential Agreements Undermine the Multilateral Trading System?," Economic Journal, Royal Economic Society, vol. 108(449), pages 1162-1182, July.
  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.
  14. 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.
  15. 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.
  16. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
  17. 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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