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Welfare effects of preferential trade agreements under optimal tariffs

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  • Saggi, Kamal
  • Yildiz, Halis Murat

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 ignored) distinction 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.

Suggested Citation

  • Saggi, Kamal & Yildiz, Halis Murat, 2005. "Welfare effects of preferential trade agreements under optimal tariffs," MPRA Paper 17562, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17562
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    References listed on IDEAS

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    Cited by:

    1. Desmet, Klaus & Facchini, Giovanni & Deltas, George, 2006. "Hub-and-Spoke Free Trade Areas," CEPR Discussion Papers 5960, C.E.P.R. Discussion Papers.
    2. Jinsoo Park, 2015. "Korea’s linkage strategy between FTA hub policy and middle power leadership in regional economic integration," Asia Europe Journal, Springer, vol. 13(4), pages 379-394, December.

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    More about this item

    Keywords

    Free Trade Agreements; Customs Unions; External Tariffs; Welfare; Intraindustry Trade; Oligopoly;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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