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On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

  • Kamal Saggi


    (Department of Economics, Vanderbilt University)

  • Alan Woodland


    (Department of Economics, University of New South Wales)

  • Halis Murat Yildiz


    (Department of Economics, Ryerson University)

This paper analyzes a game of trade policy (called Bilateralism) between three countries in which each country chooses whether to liberalize trade preferentially in the form of a Customs Union (CU), multilaterally, or not at all. We also analyze a restricted version of this game (called Multilateralism) under which countries do not have the option to form CUs. The analysis sheds light on the relationship between multilateral and preferential trade liberalization as sanctioned by GATT Article XXIV. We find that when countries have symmetric endowments, global free trade can be achieved without permitting CUs. Allowing for asymmetry, we isolate circumstances where Article XXIV helps further the cause of multilateral liberalization as well as when it does not. Furthermore, we show that Article XXIV's stipulation -- that countries forming a CU not raise tariffs on outsiders -- fails to make multilateral liberalization any more attractive to countries. However, such a tariff restriction does lower the adverse impact of a CU on the non-member.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1116.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1116
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  1. Estevadeordal, Antoni & Freund, Caroline & Ornelas, Emanuel, 2008. "Does regionalism affect trade liberalization toward non-members ?," Policy Research Working Paper Series 4751, The World Bank.
  2. Bagwell, Kyle & Staiger, Robert W., 1997. "Multilateral tariff cooperation during the formation of customs unions," Journal of International Economics, Elsevier, vol. 42(1-2), pages 91-123, February.
  3. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1475-1506, November.
  4. Riezman, Raymond, 1985. "Customs unions and the core," Journal of International Economics, Elsevier, vol. 19(3-4), pages 355-365, November.
  5. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  6. Seidmann, Daniel J., 2009. "Preferential trading arrangements as strategic positioning," Journal of International Economics, Elsevier, vol. 79(1), pages 143-159, September.
  7. Saggi, Kamal & Yildiz, Halis Murat, 2009. "Bilateralism, multilateralism, and the quest for global free trade," MPRA Paper 17558, University Library of Munich, Germany.
  8. Kyle Bagwell & Robert W. Staiger, 1993. "Multilateral Tariff Cooperation During the Formation of Free Trade Areas," Discussion Papers 1048, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Syropoulos, Constantinos, 2003. "Rules for the disposition of tariff revenues and the determination of common external tariffs in customs unions," Journal of International Economics, Elsevier, vol. 60(2), pages 387-416, August.
  10. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
  11. Taiji Furusawa & Hideo Konishi, 2002. "Free Trade Networks," Boston College Working Papers in Economics 548, Boston College Department of Economics, revised 08 Sep 2003.
  12. Melatos, Mark & Woodland, Alan, 2007. "Endogenous trade bloc formation in an asymmetric world," European Economic Review, Elsevier, vol. 51(4), pages 901-924, May.
  13. Eric W. Bond & Raymond G. Riezman & Constantinos Syropoulos, 2013. "A strategic and welfare theoretic analysis of free trade areas," World Scientific Book Chapters, in: International Trade Agreements and Political Economy, chapter 8, pages 101-127 World Scientific Publishing Co. Pte. Ltd..
  14. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
  15. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, vol. 42(1), pages 13-29, June.
  16. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, 02.
  17. Costas Hadjiyiannis, 2004. "Regionalism and Multilateral Trade Liberalization with Asymmetric Countries," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 395-411, 08.
  18. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  19. Philippe Aghion & Pol Antràs & Elhanan Helpman, 2004. "Negotiating Free Trade," NBER Working Papers 10721, National Bureau of Economic Research, Inc.
  20. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
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