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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:van:wpaper:1116
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    2. Moise Nken & Halis Murat Yildiz, 2017. "Implications of multilateral tariff bindings on the formation of preferential trade agreements and quest for global free trade," Working Papers 068, Ryerson University, Department of Economics.
    3. Missios, Paul & Saggi, Kamal & Yildiz, Halis Murat, 2016. "External trade diversion, exclusion incentives and the nature of preferential trade agreements," Journal of International Economics, Elsevier, vol. 99(C), pages 105-119.
    4. 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.
    5. Gene M. Grossman, 2016. "The Purpose of Trade Agreements," NBER Working Papers 22070, National Bureau of Economic Research, Inc.
    6. repec:smu:ecowpa:1403 is not listed on IDEAS
    7. Kyle Bagwell & Robert W. Staiger & Ali Yurukoglu, 2017. ""Nash-in-Nash" Tariff Bargaining with and without MFN," NBER Working Papers 23894, National Bureau of Economic Research, Inc.
    8. Stoyanov, Andrey & Yildiz, Halis Murat, 2015. "Preferential versus multilateral trade liberalization and the role of political economy," European Economic Review, Elsevier, vol. 80(C), pages 140-164.
    9. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.
    10. Mavroidis, Petros C., 2011. "Always look at the bright side of non-delivery: WTO and Preferential Trade Agreements, yesterday and today," World Trade Review, Cambridge University Press, vol. 10(03), pages 375-387, July.
    11. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," MPRA Paper 76330, University Library of Munich, Germany.
    12. James Lake, 2017. "Free Trade Agreements As Dynamic Farsighted Networks," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 31-50, January.
    13. Gnutzmann, Hinnerk; Gnutzmann-Mkrtchyan, Arevik, 2016. "The Silent Success of Customs Unions," Economics Working Papers ECO2016/02, European University Institute.
    14. Hinnerk Gnutzmann & Arevik Gnutzmann-Mkrtchyan, 2016. "The Silent Success of Customs Unions," CESifo Working Paper Series 5944, CESifo Group Munich.
    15. Halis Murat Yildiz, 2014. "Hub and spoke trade agreements under oligopoly with asymmetric costs," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(1), pages 97-110, February.
    16. Paul Missios & Halis Murat Yildiz, 2017. "Do SouthSouth preferential trade agreements undermine the prospects for multilateral free trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 50(1), pages 111-161, February.
    17. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    18. 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.

    More about this item

    Keywords

    Customs Unions; preferential trade agreements; multilateral trade liberalization; GATT; WTO;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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