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Why are Trade Agreements Regional?

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Author Info
Ben Zissimos (Vanderbilt University)

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Abstract

This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries, a familiar problem of coordination failure arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.67.

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Date of creation: Jun 2007
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Handle: RePEc:fem:femwpa:2007.67

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Related research
Keywords: Coalition; Coordination; Regionalism; Preferential Trade Agreement; Trade Liberalization;

Find related papers by JEL classification:
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F15 - International Economics - - Trade - - - Economic Integration
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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References listed on IDEAS
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  28. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May. [Downloadable!] (restricted)
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