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Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility

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  • James Lake

    (Southern Methodist University)

Abstract

In practice, Free Trade Agreements (FTAs) outnumber Customs Unions (CUs) by a ratio of 9 : 1. Nevertheless, the literature traditionally views CUs as optimal for members because CU members coordinate external tariffs. I show that a dynamic FTA flexibility benefit can help explain the prevalence of FTAs : individual FTA members have the flexibility to form their own future FTAs whereas CU members must jointly engage in future CU formation. Under asymmetry, even arbitrarily small degrees thereof, FTAs emerge in equilibrium if and only if the FTA flexibility benefit outweighs the CU coordination benefit.

Suggested Citation

  • James Lake, 2016. "Why don't more countries form Customs Unions instead of Free Trade Agreements? The role of flexibility," Departmental Working Papers 1601, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1601
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    References listed on IDEAS

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    1. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
    2. James Lake, 2017. "Free Trade Agreements As Dynamic Farsighted Networks," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 31-50, January.
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    6. 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..
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    10. 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..
    11. 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..
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Preferential Trade Agreement; Free Trade Agreement; Customs Union; coordination; flexibility; free riding; networks; farsighted.;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative 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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