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Tariff Bindings and the Dynamic Formation of Preferential Trade Agreements

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  • James Lake

    (Department of Economics, Southern Methodist University)

  • Moise Nken

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

  • Halis Murat Yildiz

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

Abstract

We show that multilateral tari§ binding liberalization substantially impacts the nature and extent of Preferential Trade Agreement (PTA) formation. First, it shapes the nature of forces constraining expansion of Free Trade Agreements (FTAs). The constraining force is a free riding incentive of FTA non-members under relatively high bindings but an exclusion incentive of FTA members under relatively low bindings. Second, multilateral tari§ binding liberalization shapes the role played by PTAs in the attainment of global free trade. Initially, tari§ binding liberalization leads to Custom Union (CU) formation in equilibrium but in a way that undermines the pursuit of global free trade. However, further tari§ binding liberalization leads to FTA formation in equilibrium and in a way that facilitates the attainment of global free trade. Our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of FTAs versus CUs.

Suggested Citation

  • James Lake & Moise Nken & Halis Murat Yildiz, 2018. "Tariff Bindings and the Dynamic Formation of Preferential Trade Agreements," Working Papers 072, Ryerson University, Department of Economics.
  • Handle: RePEc:rye:wpaper:wp072
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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. Akihiko Yanase & Hiroshi Kurata, 2022. "Domestic product standards, harmonization, and free trade agreements," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(3), pages 855-885, August.
    3. Moïse Nken & Halis Murat Yildiz, 2022. "Implications of multilateral tariff bindings on the extent of preferential trade agreement formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 301-347, February.
    4. 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.
    5. Martin Richardson, 2021. "An elementary tariff reform for a free trade area," ANU Working Papers in Economics and Econometrics 2021-680, Australian National University, College of Business and Economics, School of Economics.
    6. Emanuel Ornelas & Patricia Tovar, 2021. "Intra-bloc tariffs and preferential margins in trade agreements," CEP Discussion Papers dp1791, Centre for Economic Performance, LSE.
    7. Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2022. "The role of non‐discrimination in a world of discriminatory preferential trade agreements," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 174-212, February.
    8. Jámbor, Attila & Török, Áron, 2019. "A regionális kereskedelmi egyezmények létrejöttét meghatározó tényezők [Global drivers of regional trade agreements]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 418-433.
    9. Ornelas, Emanuel & Tovar, Patricia, 2022. "Intra-bloc tariffs and preferential margins in trade agreements," Journal of International Economics, Elsevier, vol. 138(C).
    10. Appelbaum, Elie & Melatos, Mark, 2021. "Preferential Trade Agreements as Insurance," Working Papers 2021-04, University of Sydney, School of Economics.
    11. Harold D Chiang & Yukun Ma & Joel Rodrigue & Yuya Sasaki, 2021. "Dyadic double/debiased machine learning for analyzing determinants of free trade agreements," Papers 2110.04365, arXiv.org, revised Mar 2022.
    12. Chang, Winston W. & Chen, Tai-Liang & Saito, Tetsuya, 2021. "Formation of symmetric free-trade blocs, optimal tariff structure, and world welfare," Journal of Asian Economics, Elsevier, vol. 77(C).

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    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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