How Does Uncertainty Affect the Choice of Trade Agreements?
This paper analyzes how uncertainty and the timing of its resolution influence the formation and design of regional trade agreements. Two sources of uncertainty — in demand and costs — are considered. We compare the case in which uncertainty is resolved "early" (before tariffs are chosen), with the case in which uncertainty is resolved "late" (after tariffs are chosen). These cases are, in turn, compared with the benchmark case of no uncertainty. We demonstrate that, as long as some decisions are made after uncertainty is resolved, trade agreements have option values. These option values differ across agreements, reflecting members' different degrees of (trade policy) freedom to respond to changes in the trading environment. Moreover, these option values may be sufficiently large as to lead prospective members to opt for a more flexible trading arrangement (such as a free trade area) over a less flexible agreement (such as a customs union). Indeed, countries may even prefer to stand alone than join a free trade area under some circumstances. Finally, we show that the timing of the resolution of uncertainty can significantly impact the type of trade agreement that countries wish to form.
|Date of creation:||Apr 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 61 +2 9351 5055
Fax: 61 +2 9351 4341
Web page: http://sydney.edu.au/arts/economics
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alberto Martin & Wouter Vergote, 2005.
"On the role of retaliation in trade agreements,"
Economics Working Papers
914, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
- MARTIN, Alberto & VERGOTE, Wouter, 2007. "On the role of retaliation in trade agreements," CORE Discussion Papers 2007089, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- MARTIN, Alberto & VERGOTE, Wouter, . "On the role of retaliation in trade agreements," CORE Discussion Papers RP -2037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Freund, Caroline & Ornelas, Emanuel, 2010.
"Regional trade agreements,"
Policy Research Working Paper Series
5314, The World Bank.
- Caroline Freund & Emanuel Ornelas, 2009. "Regional trade agreements," LSE Research Online Documents on Economics 28697, London School of Economics and Political Science, LSE Library.
- Caroline Freund & Emanuel Ornelas, 2009. "Regional Trade Agreements," CEP Discussion Papers dp0961, Centre for Economic Performance, LSE.
- Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
- Riezman, Raymond, 1985. "Customs unions and the core," Journal of International Economics, Elsevier, vol. 19(3-4), pages 355-365, November.
- Jennifer Pédussel Wu, 2005. "Trade Agreements as Self-Protection," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 472-484, 08.
- Wilfred J. Ethier, 2002. "Unilateralism in a Multilateral World," Economic Journal, Royal Economic Society, vol. 112(479), pages 266-292, April.
- Carlo Perroni & John Whalley, 2000.
"The new regionalism: trade liberalization or insurance?,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 33(1), pages 1-24, February.
- Carlo Perroni & John Whalley, 1994. "The New Regionalism: Trade Liberalization or Insurance?," NBER Working Papers 4626, National Bureau of Economic Research, Inc.
- Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2006.
"Trade Agreements as Endogenously Incomplete Contracts,"
NBER Working Papers
12745, National Bureau of Economic Research, Inc.
- Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
- Horn, Henrik & Maggi, Giovanni & Staiger, Robert, 2007. "Trade Agreements as Endogenously Incomplete Contracts," CEPR Discussion Papers 6037, C.E.P.R. Discussion Papers.
- Horn, Henrik & Maggi, Giovanni & Staiger, Rikard W., 2007. "Trade Agreements as Endogenously Incomplete Contracts," Working Paper Series 689, Research Institute of Industrial Economics.
- Caroline Freund, 2010. "Third‐country Effects of Regional Trade Agreements," The World Economy, Wiley Blackwell, vol. 33(11), pages 1589-1605, November.
- Caroline Freund & Emanuel Ornelas, 2010. "Regional trade agreements: blessing or burden?," CentrePiece - The Magazine for Economic Performance 313, Centre for Economic Performance, LSE.
- Dasgupta, Partha & Stiglitz, Joseph E, 1977. "Tariffs vs . Quotas as Revenue Raising Devices under Uncertainty," American Economic Review, American Economic Association, vol. 67(5), pages 975-81, December.
- Grant, Simon & Quiggin, John, 1997. "Strategic Trade Policy under Uncertainty: Sufficient Conditions for the Optimality of Ad Valorem, Specific and Quadratic Trade Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(1), pages 187-203, February.
When requesting a correction, please mention this item's handle: RePEc:syd:wpaper:2123/8207. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Vanessa Holcombe)
If references are entirely missing, you can add them using this form.