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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. Egger, Peter & Larch, Mario, 2008. "Interdependent preferential trade agreement memberships: An empirical analysis," Journal of International Economics, Elsevier, vol. 76(2), pages 384-399, December.
  2. Bond, Eric W. & Riezman, Raymond G. & Syropoulos, Constantinos, 2004. "A strategic and welfare theoretic analysis of free trade areas," Journal of International Economics, Elsevier, vol. 64(1), pages 1-27, October.
  3. Kamal Saggi & Alan Woodland & Halis Murat Yildiz, 2011. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions," Vanderbilt University Department of Economics Working Papers 1116, Vanderbilt University Department of Economics.
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  7. Ben Zissimos, 2010. "Why are Trade Agreements Regional?," Vanderbilt University Department of Economics Working Papers 1002, Vanderbilt University Department of Economics.
  8. Gatsios, Konstantine & Karp, Larry, 1989. "Delegation Games in Customs Unions," CEPR Discussion Papers 337, C.E.P.R. Discussion Papers.
  9. Giovanni Facchini & Peri Silva & Gerald Willmann, 2008. "The Customs Union issue: Why do we observe so few of them?," Center for Economic Studies - Discussion papers ces0827, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  10. Soegaard, Christian, 2013. "An Oligopolistic Theory of Regional Trade Agreements," The Warwick Economics Research Paper Series (TWERPS) 1007, University of Warwick, Department of Economics.
  11. Dutta, Bhaskar & Ghosal, Sayantan & Ray, Debraj, 2005. "Farsighted network formation," Journal of Economic Theory, Elsevier, vol. 122(2), pages 143-164, June.
  12. Appelbaum, Elie & Melatos, Mark, 2012. "How Does Uncertainty Affect the Choice of Trade Agreements?," Working Papers 2012-08, University of Sydney, School of Economics.
  13. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
  14. Saggi, Kamal & Yildiz, Halis Murat, 2009. "Bilateralism, multilateralism, and the quest for global free trade," MPRA Paper 17558, University Library of Munich, Germany.
  15. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
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  18. Rodney D. Ludema, 1991. "International Trade Bargaining And The Most-Favored-Nation Clause," Economics and Politics, Wiley Blackwell, vol. 3(1), pages 1-20, 03.
  19. Ray, D. & Vohra, R., 1993. "Equilibrium Binding Agreements," Papers 21, Boston University - Department of Economics.
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  25. James Lake, 2013. "Free Trade Agreements as dynamic farsighted networks," Departmental Working Papers 1304, Southern Methodist University, Department of Economics.
  26. repec:smu:ecowpa:1303 is not listed on IDEAS
  27. Kamal Saggi, Halis Murat Yildiz, 2009. "Optimal tariffs of preferential trade agreements and the tariff complementarity effect," Indian Growth and Development Review, Emerald Group Publishing, vol. 2(1), pages 5-17, April.
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