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On the Value of Preferential Trade Agreements in Multilateral Negotiations

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  • Rodney D. Ludema

    (Georgetown University)

Abstract

This paper explores the effects of preferential trade agreements (PTAs) on multilateral negotiations using a three-country, noncooperative bargaining model. PTAs are treated as outside options of the multilateral negotiation, with the feature that they continue to negotiate after they form. The organization of a PTA, whether into a customs union (CU) or free-trade area (FTA), is crucial. CUs benefit from the strategic commitment afforded by common external trade barriers, but this benefit is reduced by asymmetry between the CU partners and by discounting. It is also affected by externalities that any additional PTAs impose on members of the first. FTAs reduce the multilateral bargaining outcome effectively to one of simultaneous bilateral bargaining, whereas CUs result in a large share going to the country that has the first option of forming one. By way of example it is shown that, when CUs and FTAs are considered together, the distribution lies in between the pure FTA and CU outcomes, and there is no general presumption that relatively large countries will prefer a regime that permits PTAs to one that does not.

Suggested Citation

  • Rodney D. Ludema, 1998. "On the Value of Preferential Trade Agreements in Multilateral Negotiations," International Trade 9802003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpit:9802003
    Note: Type of Document - MS Word; prepared on IBM PC; to print on HP; pages: 40 ; figures: included. I would like to thank James Brander, James Cassing, John McMillan, Ray Riezman, Ian Wooton and an anonymous referee for valuable comments. Any errors are my own.
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mohammad Amin, 2004. "Time Inconsistency of Trade Policy and Multilateralism," International Trade 0402002, University Library of Munich, Germany.
    2. Baldwin, Richard, 2008. "Big-Think Regionalism: a Critical Survey," CEPR Discussion Papers 6874, C.E.P.R. Discussion Papers.
    3. Dan A. Black & Mark C. Berger & Jeffrey A. Smith & Brett J. Noel, 1999. "Is the Threat of Training More Effective Than Training Itself? Experimental Evidence from the UI System," UWO Department of Economics Working Papers 9907, University of Western Ontario, Department of Economics.
    4. 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.
    5. Burbidge, John B. & James A. DePater & Gordon M. Meyers & Abhijit Sengupta, 1997. "A Coalition-Formation Approach to Equilibrium Federations and Trading Blocs," American Economic Review, American Economic Association, vol. 87(5), pages 940-956, December.
    6. Carsten Kowalczyk & Donald R. Davis, 1998. "Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA," NBER Chapters,in: The Regionalization of the World Economy, pages 227-258 National Bureau of Economic Research, Inc.
    7. Winters, L. Alan, 1996. "Regionalism versus multilateralism," Policy Research Working Paper Series 1687, The World Bank.
    8. Kyle Bagwell & Robert W. Staiger, 1993. "Multilateral Tarriff Cooperation During the Formation of Regional Free Trade Areas," NBER Working Papers 4364, National Bureau of Economic Research, Inc.
    9. Bond, Eric W. & Syropoulos, Constantinos & Winters, L. Alan, 2001. "Deepening of regional integration and multilateral trade agreements," Journal of International Economics, Elsevier, vol. 53(2), pages 335-361, April.
    10. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
    11. Mette Ersbak Bang Nielsen, 2006. "The endogenous formation of sustanaible trade agreements," Revista de Economía del Rosario, Universidad del Rosario, June.
    12. Madanmohan Ghosh & Carlo Perroni & John Whalley, 1998. "The Value of MFN Treatment," NBER Working Papers 6461, National Bureau of Economic Research, Inc.

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    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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