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WHY ARE TRADE AGREEMENTS REGIONAL? A Theory Based on Noncooperative Networks

Author

Listed:
  • Zissimos, Ben

    (University of Birmingham)

Abstract

This paper argues that free trade agreements (FTAs) are regional because, in their absence, optimal tariffs are higher against (close) regional partners than (distant) countries outside the region. Optimal tariffs shift rents from foreign firms to domestic citizens. Lower transport costs imply higher rents and therefore higher tariffs. So regional FTAs have a higher payoff than non-regional FTAs. Therefore, only regional FTAs may yield positive gains when sponsoring a FTA is costly. To analyze equilibrium, standard theory of non-cooperative networks is extended to allow for asymmetric players. Naive best response dynamics show that ‘trade blocks can be stepping blocks’ for free trade.

Suggested Citation

  • Zissimos, Ben, 2002. "WHY ARE TRADE AGREEMENTS REGIONAL? A Theory Based on Noncooperative Networks," The Warwick Economics Research Paper Series (TWERPS) 652, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:652
    as

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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp652.pdf
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    References listed on IDEAS

    as
    1. Furusawa, Taiji & Konishi, Hideo, 2007. "Free trade networks," Journal of International Economics, Elsevier, vol. 72(2), pages 310-335, July.
    2. Barbara J. Spencer & James A. Brander, 1982. "Tariff Protection and Imperfect Competition," Working Papers 517, Queen's University, Department of Economics.
    3. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    4. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
    5. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
    6. repec:spr:compst:v:52:y:2000:i:1:p:39-56 is not listed on IDEAS
    7. Bhagwati, Jagdish & Greenaway, David & Panagariya, Arvind, 1998. "Trading Preferentially: Theory and Policy," Economic Journal, Royal Economic Society, vol. 108(449), pages 1128-1148, July.
    8. Roger B. Myerson, 1976. "Graphs and Cooperation in Games," Discussion Papers 246, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Importance Sampling ; Filtering ; Particle filter ; Simulation ; SIR ; State space;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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