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Abstract

In a three country model with endogenous tariffs, this paper evaluates and contrasts the welfare effects of free trade agreements FTAs and customs unions CUs — the two most commonly occurring preferential trade agreements PTAs. We show that if the external tariff of a PTA is not too high, it benefits both members and non-members. We also highlight the implications of a key but commonly ignoreddistinction between the two types of PTAs: while an FTA member can form an another independent FTA with an existing non-member, a CU member cannot. Under a pair of independent bilateral FTAs, the common member’s welfare is higher than that under free trade. Furthermore, if the common member is relatively efficient compared to the other two countries, such a ‘hub and spoke’ pattern of FTAs can yield higher global welfare than free trade. By contrast, such an outcome is never possible under a CU.



Item Type: MPRA Paper -

Original Title: Welfare effects of preferential trade agreements under optimal tariffs-

Language: English-

Keywords: Free Trade Agreements, Customs Unions, ExternalTariffs, Welfare, Intraindustry Trade, Oligopoly-

Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade OrganizationsF - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation-





Author: Saggi, Kamal

Source: https://mpra.ub.uni-muenchen.de/17562/







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