Can Bilateral Trade Agreements Help Induce Free Trade?
There has been growing debate about whether bilateral trade agreements are damaging multilateral efforts to eliminate barriers to international trade. This paper develops a model in which trading blocs always charge optimal tariffs and make trade agreements based on strategic considerations. We ask a very simple question. Does the fact that trading blocs can form bilateral trade agreements make Free trade less likely to occur? The answer is that it depends on the size distribution of the trading blocs. If there is one large trading bloc along with some smaller ones then bilateral trade agreements allow the smaller trading blocs to coalesce and block the monopoly power of large trading blocs. In this case, bilateral trade agreements facilitate the attainment of free trade. Not allowing customs unions leads to more not less protection. If trading blocs are of roughly equivalent size then bilateral trade agreements allow groups of trading blocs to more effectively monopolize world trade in which case they may make free trade less likely. These results suggest that a policy that inhibits the formation of trading blocs may be harmful. We also compute the welfare effects of trade agreements to get some idea of how empirically important these issues are.
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"Regional Trading Arrangements: Natural or Super-Natural?,"
Center for International and Development Economics Research (CIDER) Working Papers
C96-059, University of California at Berkeley.
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"Bringing GATT into the Core,"
NBER Working Papers
4343, National Bureau of Economic Research, Inc.
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"Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?,"
NBER Working Papers
3027, National Bureau of Economic Research, Inc.
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"Optimal Tariff Equilibria with Customs Unions,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 23(1), pages 70-83, February.
- Haverman, J.D., 1993. "Some Welfare Effects of Dynamic Customs Union Formation," Papers 93-109, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
- Jon D. Haveman, 1996. "Some Welfare Effects of Sequential Customs Union Formation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 941-58, November.
- Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
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