IDEAS home Printed from https://ideas.repec.org/p/rye/wpaper/wp067.html
   My bibliography  Save this paper

Preferential Trade Agreements and Rules of the Multilateral Trading System

Author

Listed:
  • Kamal Saggi

    () (Department of Economics, Vanderbilt University, Nashville, TN)

  • Woan Foong Wong

    () (Department of Economics, University of Oregon, Eugene, Oregon)

  • Halis Murat Yildiz

    () (Department of Economics, Ryerson University, Toronto, Canada)

Abstract

In a three-country model of endogenous trade agreements, we study the effects of major WTO rules governing the conduct of free trade agreements (FTAs). We show that FTA members retain positive internal tariffs even if they seek to maximize their joint welfare. Requiring FTAs to eliminate internal tariffs — as stipulated by current WTO rules — makes the non-member better o§ although it simultaneously reduces the likelihood of achieving global free trade by encouraging free-riding on its part. While the WTO’s non-discrimination constraint is not necessarily conducive to reaching global free trade, it raises welfare in a tariff-ridden world.

Suggested Citation

  • Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," Working Papers 067, Ryerson University, Department of Economics.
  • Handle: RePEc:rye:wpaper:wp067
    as

    Download full text from publisher

    File URL: http://economics.ryerson.ca/workingpapers/wp067.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February.
    2. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 8, pages 168-185, World Scientific Publishing Co. Pte. Ltd..
    3. Kamal Saggi, 2018. "The MFN clause, welfare, and multilateral cooperation between countries of unequal size," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 14, pages 312-323, World Scientific Publishing Co. Pte. Ltd..
    4. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    5. Ornelas, Emanuel, 2005. "Trade creating free trade areas and the undermining of multilateralism," European Economic Review, Elsevier, vol. 49(7), pages 1717-1735, October.
    6. Cadot, Olivier & de Melo, Jaime & Olarraga, Marcelo, 1999. "Regional Integration and Lobbying for Tariffs against Nonmembers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 635-657, August.
    7. Caroline Freund, 2010. "Third‐country Effects of Regional Trade Agreements," The World Economy, Wiley Blackwell, vol. 33(11), pages 1589-1605, November.
    8. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
    9. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    10. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
    11. Caroline Freund & Emanuel Ornelas, 2010. "Regional Trade Agreements," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 139-166, September.
    12. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
    13. 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, August.
    14. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    15. Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2018. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 10, pages 223-237, World Scientific Publishing Co. Pte. Ltd..
    16. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, vol. 42(1), pages 13-29, June.
    17. Kamal Saggi & Halis Murat Yildiz, 2018. "Bilateralism, multilateralism, and the quest for global free trade," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 7, pages 156-167, World Scientific Publishing Co. Pte. Ltd..
    18. Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2018. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 9, pages 186-222, World Scientific Publishing Co. Pte. Ltd..
    19. Kamal Saggi, 2018. "Tariffs and the most favored nation clause," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
    20. Rodney D. Ludema & Anna Maria Mayda, 2013. "Do terms-of-trade effects matter for trade agreements? Theory and evidence from WTO Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1837-1893.
    21. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
    22. Ludema, Rodney D. & Mayda, Anna Maria, 2009. "Do countries free ride on MFN?," Journal of International Economics, Elsevier, vol. 77(2), pages 137-150, April.
    23. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    24. Xuepeng Liu, 2010. "Testing Conflicting Political Economy Theories: Full-Fledged versus Partial-Scope Regional Trade Agreements," Southern Economic Journal, Southern Economic Association, vol. 77(1), pages 78-103, July.
    25. Caroline Freund & Emanuel Ornelas, 2010. "Regional trade agreements: blessing or burden?," CentrePiece - The Magazine for Economic Performance 313, Centre for Economic Performance, LSE.
    26. Bagwell, Kyle & Staiger, Robert W., 2010. "Backward stealing and forward manipulation in the WTO," Journal of International Economics, Elsevier, vol. 82(1), pages 49-62, September.
    27. Horn, Henrik & Mavroidis, Petros C., 2001. "Economic and legal aspects of the Most-Favored-Nation clause," European Journal of Political Economy, Elsevier, vol. 17(2), pages 233-279, June.
    28. Olarreaga, Marcelo & Soloaga, Isidro, 1998. "Endogenous Tariff Formation: The Case of Mercosur," World Bank Economic Review, World Bank Group, vol. 12(2), pages 297-320, May.
    29. John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 5, pages 53-66, World Scientific Publishing Co. Pte. Ltd..
    30. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    31. Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February.
    32. Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
    33. Richardson, Martin, 1995. "Tariff revenue competition in a free trade area," European Economic Review, Elsevier, vol. 39(7), pages 1429-1437, August.
    34. Harry G. Johnson, 1965. "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, University of Chicago Press, vol. 73, pages 256-256.
    35. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1475-1506.
    36. McCalman, Phillip, 2002. "Multi-lateral trade negotiations and the Most Favored Nation clause," Journal of International Economics, Elsevier, vol. 57(1), pages 151-176, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Elie Appelbaum & Mark Melatos, 2018. "Are Customs Unions Really So Scarce?," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 391-404, December.

    More about this item

    Keywords

    Free Trade Agreements; Tariffs; Customs Unions; World Trade Organization; Coalition proof Nash equilibrium; Welfare;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rye:wpaper:wp067. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maurice Roche). General contact details of provider: http://edirc.repec.org/data/deryeca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.