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Implications of multilateral tariff bindings on the formation of preferential trade agreements and quest for global free trade

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  • Moise Nken

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

  • Halis Murat Yildiz

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

Abstract

Using an endogenous preferential trade agreement (PTA) formation model under all possible multilaterally negotiated bound tariff rates, we examine the effects of multilateral trade liberalization on the role of PTAs in achieving global free trade. We first show that, when countries are completely symmetric, no country has an incentive to unilaterally deviate (free ride) from free trade network while exclusion incentives arise when bound tariffs are sufficiently low. Due to the relatively flexible nature of the FTA formation, such exclusion incentives go unexercised and free trade always obtains as the coalition-proof Nash equilibrium (CPNE) of the FTA game. However, such flexibility does not exist under the CU game and thus countries are able to exercise the exclusion incentive and free trade fails to be CPNE when the bound tariff rates are sufficiently low. We then consider a scenario where countries are asymmetric with respect to their comparative advantage. The country with a weaker comparative advantage has an incentive to free ride on trade liberalization of the other two countries and lower bound tariff rates disciplines this incentive via limiting the ability to set optimal tariffs. As a result, multilateral free trade is more likely to be a CPNE as the multilateral negotiated bound tariff rates decline. This result provides support for the idea that multilateral trade liberalization acts as a complement to the FTA formation in achieving global free trade.

Suggested Citation

  • Moise Nken & Halis Murat Yildiz, 2017. "Implications of multilateral tariff bindings on the formation of preferential trade agreements and quest for global free trade," Working Papers 068, Ryerson University, Department of Economics.
  • Handle: RePEc:rye:wpaper:wp068
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    Cited by:

    1. Lake, James & Nken, Moïse & Yildiz, Halis Murat, 2020. "Tariff bindings and the dynamic formation of Preferential Trade Agreements," Journal of International Economics, Elsevier, vol. 122(C).
    2. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2019. "Should the WTO require free trade agreements to eliminate internal tariffs?," Journal of International Economics, Elsevier, vol. 118(C), pages 316-330.

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    More about this item

    Keywords

    Bound Tariff Rates; Coalition proof Nash equilibrium; Free Trade Agreement; Customs Union; Exclusion Incentive; Free Riding Incentive;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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