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Preferential Trade Agreements and Welfare: General Equilibrium Analysis

This paper studies the welfare effects of a preferential trade agreement (PTA) within a general equilibrium framework following Eaton and Kortum (2002) and conducts a comparative statics analysis of the equilibrium. The paper provides a closed-form analysis with no assumption of balanced trade and analyzes how a PTA affects the price level, trade flows, and welfare of both member and nonmember countries. We show that a PTA decreases the price level of not only member but also nonmember countries. We also show that a positive coalition externality can arise in that a nonmember country can gain from the establishment of a PTA. Our analysis indicates that countries possessing a large nonmanufacturing sector relative to the economy or a high level of technology are more likely to gain from a coalition externality. Under no assumption of balanced trade, our analysis demonstrates that changes in tariff revenues and labor mobility between tradable and nontradable sectors are a key factor affecting welfare and, thus, countries’ incentives to join a PTA. Finally, using a calibrated model for 38 countries, we estimate price and welfare changes under several scenarios of the Trans-Pacific Partnership (TPP) and numerically demonstrate our theoretical results. equilibrium model to explore how a Trans-Pacific Partnership affects each country’s welfare and trade flows. We decompose the total change of trade flows from member countries into income effects and substitution effects, and investigate the factors that affect trade flows. We demonstrate that a positive coalition externality could exist in that some nonmember countries could gain more than member countries and further investigate under which circumstances it arises.

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File URL: http://www.uq.edu.au/economics/abstract/482.pdf
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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 482.

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Date of creation: 10 Jul 2013
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Handle: RePEc:qld:uq2004:482
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Web page: http://www.uq.edu.au/economics/
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  1. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
  2. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  3. Al-Najjar, Nabil I., 2004. "Aggregation and the law of large numbers in large economies," Games and Economic Behavior, Elsevier, vol. 47(1), pages 1-35, April.
  4. Aghion, Philippe & Antras, Pol & Helpman, Elhanan, 2007. "Negotiating free trade," Journal of International Economics, Elsevier, vol. 73(1), pages 1-30, September.
  5. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  6. John B. Burbidge & James A. DePater & Gordon M. Myers & Abhijit Sengupta, 1996. "A Coalition-formation Approach to Equilibrium Federations and Trading Block s," Department of Economics Working Papers 1996-05, McMaster University.
  7. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  8. Arnaud Costinot & Dave Donaldson & Ivana Komunjer, 2010. "What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas," NBER Working Papers 16262, National Bureau of Economic Research, Inc.
  9. Wilson, Charles A, 1980. "On the General Structure of Ricardian Models with a Continuum of Goods: Applications to Growth, Tariff Theory, and Technical Change," Econometrica, Econometric Society, vol. 48(7), pages 1675-1702, November.
  10. Patrick J. Kehoe & Timothy J. Kehoe, 1994. "Capturing NAFTA's impact with applied general equilibrium models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 17-34.
  11. Juyoung Cheong & Shino Takayama, 2013. "Who Gains the Most in Preferential Trade Agreements?," Discussion Papers Series 475, School of Economics, University of Queensland, Australia.
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