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External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements

Author

Listed:
  • Paul Missios

    (Department of Economics, Ryerson University, Toronto, Canada)

  • Kamal Saggi

    (Department of Economics, Vanderbilt University, Nashville, TN)

  • Halis Murat Yildiz

    (Department of Economics, Ryerson University, Toronto, Canada)

Abstract

In a game of endogenous trade agreements between three countries, we show that while the pursuit of customs unions (CUs) prevents global free trade from emerging as a coalition-proof Nash equilibrium, the pursuit of free trade agreements (FTAs) does not. This result refl?ects the relatively ?exible nature of FTAs: whereas each FTA member can independently undertake further trade liberalization with respect to the non-member, CU members must do so as a group due to their common external tariff. By diverting members?exports away from the non-member, both types of trade agreements induce the non-member to voluntarily lower its import tariffs.

Suggested Citation

  • Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2014. "External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements," Working Papers 047, Toronto Metropolitan University, Department of Economics, revised Sep 2015.
    • Handle: RePEc:rye:wpaper:wp047
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    References listed on IDEAS

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    More about this item

    Keywords

    Free Trade Agreement; Customs Union; Hub and Spoke Agreements; Free Trade; Optimal Tariffs; PTA; FTA.;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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