A strategic and welfare theoretic analysis of free trade areas

We construct a three-country model to determine how the formation of free trade areas (FTAs) affects optimal tariffs and welfare. We find that, at constant rest of the world (ROW) tariffs, the adoption of internal free trade induces union members to reduce their external tariffs below the Kemp–Wan [...

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Bibliographic Details
Published inJournal of international economics Vol. 64; no. 1; pp. 1 - 27
Main Authors Bond, Eric W., Riezman, Raymond G., Syropoulos, Constantinos
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.10.2004
Elsevier
Elsevier Sequoia S.A
SeriesJournal of International Economics
Subjects
Economic models
Economic theory
Economics
Free trade
Free trade areas
International economics
Kemp–Wan tariff adjustments
Regionalism
Strategic interactions
Strategic planning
Studies
Tariffs
Welfare
Free trade areas
Regionalism
Kemp–Wan tariff adjustments
Welfare
F42
F11
F13
F15
Strategic interactions
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Summary:We construct a three-country model to determine how the formation of free trade areas (FTAs) affects optimal tariffs and welfare. We find that, at constant rest of the world (ROW) tariffs, the adoption of internal free trade induces union members to reduce their external tariffs below the Kemp–Wan [J. Int. Econom. 6 (1976) 95–97] level, and causes ROW's terms of trade to improve and its welfare to rise. When ROW also behaves optimally, its policy response to the formation of the FTA is to raise tariffs. Generally, FTA members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large. We also demonstrate how FTAs may undermine the attainment of global free trade.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0022-1996
1873-0353
DOI:10.1016/S0022-1996(03)00078-3