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An Oligopolistic Theory of Regional Trade Agreements

  • Soegaard, Christian

    (Department of Economics, University of Warwick,)

Why are trade agreements regional? I address this question in a model of oligopoly featuring product variety. Tariffs have the effect of manipulating a country's terms of trade and shifting profits towards the domestic market at the expense of foreign trade partners. Countries endogenously form into regional trade agreements or global free trade in a framework where any agreement must be sustained by repeated interaction. A crucial parameter determining the degree of regionalism is product variety. I demonstrate that for a given trade cost and discount factor, increases in product variety leads to greater scope for global free trade relative to regional trade agreements. JEL codes: F13 ; F15.

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1007.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1007
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  1. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
  2. Bond, Eric W & Syropoulos, Costas & Winters, L. Alan, 2000. "Deepening of Regional Integration and Multilateral Trade Agreements," CEPR Discussion Papers 2480, C.E.P.R. Discussion Papers.
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  4. Monika Mrazova, 2009. "Trade negotiations when market access matters," Economics Series Working Papers 447, University of Oxford, Department of Economics.
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  6. Limão, Nuno & Saggi, Kamal, 2006. "Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements," CEPR Discussion Papers 5560, C.E.P.R. Discussion Papers.
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  10. Caroline Freund & Emanuel Ornelas, 2009. "Regional trade agreements," LSE Research Online Documents on Economics 28697, London School of Economics and Political Science, LSE Library.
  11. James Brander & Paul Krugman, 1982. "A 'Reciprocal Dumping' Model of International Trade," Working Papers 513, Queen's University, Department of Economics.
  12. Egger, Peter & Larch, Mario, 2008. "Interdependent preferential trade agreement memberships: An empirical analysis," Journal of International Economics, Elsevier, vol. 76(2), pages 384-399, December.
  13. Caroline Freund & Emanuel Ornelas, 2010. "Regional trade agreements: blessing or burden?," CentrePiece - The Magazine for Economic Performance 313, Centre for Economic Performance, LSE.
  14. Paul Krugman, 1991. "The move toward free trade zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-58.
  15. Kyle Bagwell & Robert W. Staiger, 2010. "The World Trade Organization: Theory and Practice," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 223-256, 09.
  16. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
  17. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, 02.
  18. Collie, David, 1993. "Profit-Shifting Export Subsidies and the Sustainability of Free Trade," Scottish Journal of Political Economy, Scottish Economic Society, vol. 40(4), pages 408-19, November.
  19. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
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