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 blocks always charge optimal tariffs and make trade agreements based on strategic considerations. We ask a very simple question. Does the fact that trading blocks 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 blocks. If there is one large trading block along with some smaller ones then bilateral trade agreements allow the smaller trading blocks to coalesce and block the monopoly power of large trading blocks. In this case, bilateral trade agreements facilitate the attainment of free trade. Not allowing customs unions leads to more not less protection. If trading blocks are of roughly equivalent size then bilateral trade agreements allow groups of trading blocks to more effectively monopolize world trade in which case they may make free trade less likely. These results suggest that a policy which inhibits the formation of trading blocks may be harmful. We also compute the welfare effects of trade agreements to get some idea of how empirically important these issues are.
|Date of creation:||02 Jun 1997|
|Date of revision:|
|Note:||Type of Document - MS Word; prepared on IBM PC; pages: 23 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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.:
- John Kennan & Raymond Riezman, 1990.
"Optimal Tariff Equilibria with Customs Unions,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 23(1), pages 70-83, February.
- Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
- Jeffrey A. Frankel & Ernesto Stein & Shang-Jin Wei, 1996.
"Regional Trading Arrangement: Natural or Super-Natural?,"
NBER Working Papers
5431, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A & Stein, Ernesto & Wei, Shang-Jin, 1996. "Regional Trading Arrangements: Natural or Supernatural," American Economic Review, American Economic Association, vol. 86(2), pages 52-56, May.
- Jeffrey A. Frankel, Ernesto Stein, and Shang-Jin Wei., 1996. "Regional Trading Arrangements: Natural or Super-Natural?," Center for International and Development Economics Research (CIDER) Working Papers C96-059, University of California at Berkeley.
- Gatsios, Konstantine & Karp, Larry, 1989.
"Delegation Games in Customs Unions,"
CEPR Discussion Papers
337, C.E.P.R. Discussion Papers.
- Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
- Carsten Kowalczyk & Tomas Sjostrom, 1993.
"Bringing GATT into the Core,"
NBER Working Papers
4343, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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).
- Harold L. Cole & Maurice Obstfeld, 1989.
"Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?,"
NBER Working Papers
3027, National Bureau of Economic Research, Inc.
- Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
- Lawrence H. Summers, 1991. "Regionalism and the world trading system," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 295-301.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpit:9706001. 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: (EconWPA)
If references are entirely missing, you can add them using this form.