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Why are Preferential Trade Agreements Regional? Increasing Returns, Multinationals and the Geography of Free Trade Agreements

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  • Rodney D. Ludema

    (Georgetown University)

Abstract

This paper uses a model of horizontal multinational enterprises to explore the relationship between transportation costs and trade policy cooperation. Tariffs have the effect of attracting foreign direct investment to the benefit of consumers in the host country. As transport costs fall, the incentive to impose tariffs falls and the benefits to cooperation rise. Thus, in a repeated game in which cooperation is limited by a self-enforcement constraint, a reduction in transport costs facilitates free trade. This logic is applied to a three-country model to examine cross-sectional relationships. It is found that if any country is too distant from the others, then global free trade is not attainable. Rather, if two of the countries are within a critical distance of each other and distant from the third country, then the unique outcome is an exclusive free trade agreement between the two adjacent countries. Thus, the model predicts a strong regional bias in preferential trade agreements.

Suggested Citation

  • Rodney D. Ludema, 1999. "Why are Preferential Trade Agreements Regional? Increasing Returns, Multinationals and the Geography of Free Trade Agreements," International Trade 9903002, EconWPA.
  • Handle: RePEc:wpa:wuwpit:9903002
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    References listed on IDEAS

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    Cited by:

    1. Ludema, Rodney D., 2002. "Increasing returns, multinationals and geography of preferential trade agreements," Journal of International Economics, Elsevier, vol. 56(2), pages 329-358, March.

    More about this item

    Keywords

    regionalism; trade agreements; multinational enterprises; economic geography;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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