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On the different geographic characteristics of Free Trade Agreements and Customs Unions

  • James Lake

    ()

    (Southern Methodist University)

  • Halis M. Yildiz

    ()

    (Ryerson University)

A striking phenomenon emerges from casual observation of the geographical characteristics of Preferential Trade Agreements (PTAs): while Customs Unions (CUs) are only intra-regional, Free Trade Agreements (FTAs) are both inter and intra-regional. A second striking phenomenon is that FTAs dramatically outnumber CUs. We present a farsighted dynamic model that endogenizes the choice of PTA type and rationalizes the first phenomenon via an FTA flexibility benefit: FTAs are more flexible than CUs because an FTA member is free to form further PTAs with non-members whereas a CU member must engage in further PTAs jointly with all existing members. Our model also suggests that greater distance between countries increases the prevalence of FTAs relative to CUs. Finally, the model relates geography and market size to the order of PTA formation

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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 1403.

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Date of creation: May 2014
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Handle: RePEc:smu:ecowpa:1403
Contact details of provider: Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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  1. Saggi, Kamal & Yildiz, Halis Murat, 2010. "Bilateralism, multilateralism, and the quest for global free trade," Journal of International Economics, Elsevier, vol. 81(1), pages 26-37, May.
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