Trade Agreements vs. Unilateral Tariff Reductions: Evidence from Modeling with a Continuum of Goods

• Published in: International economic review (Philadelphia) Vol. 30; no. 4; pp. 775 - 794
• Main Authors: Conway, Patrick J., Appleyard, Dennis R., Field, Alfred J.
• Format: Journal Article
• Language: English
• Published: Philadelphia, Pa The Economics Department of the University of Pennsylvania, and the Osaka University Institute of Social and Economic Research Association 01.11.1989; University of Pennsylvania, Economics Dept., and Osaka University Institute of Social and Economic Research; Blackwell Publishing Ltd
• Subjects: Agreements; Customs unions; Economic models; Endowment; Endowments; Exports; International trade; Market equilibrium; Nash equilibrium; Reduction; Statistical analysis; Studies; Tariff agreements; Tariff reductions; Tariffs; Terms of trade; Trade agreements; Trade policy; Unilateralism; Welfare economics
• ISSN: 0020-6598; 1468-2354
• DOI: 10.2307/2526751

The relative merits of preferential trading agreements and unilateral tariff reduction are investigated, yielding the conclusion that preferential agreements are superior for plausible specifications of tastes and endowments. The attractiveness of agreements, however, depends crucially on general-equilibrium effects on intra-union and external terms of trade. Game-theoretic differences between the alternative policy strategies are emphasized: agreements are cooperative equilibria while unilateral action defines a noncooperative Stackelberg equilibrium. The analytical framework is a three-country variant of the Dornbusch-Fischer-Samuelson classical trade model. Numerical simulations also illustrate that agreements may enhance government revenue and "learning-by-doing."