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Formation of symmetric free-trade blocs, optimal tariff structure, and world welfare

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  • Chang, Winston W.
  • Chen, Tai-Liang
  • Saito, Tetsuya

Abstract

We present a new tariff-game rule and a new numéraire rule in Krugman's celebrated model to form symmetric trading blocs. We hold that to maintain logical consistency in a world of symmetric trading blocs, an individual bloc should act on the actions of other individual external blocs in a one-to-one fashion, rather than to the actions of the rest of the world as a whole as assumed by Krugman, and show that Krugman's seemingly innocuous choice of the world price of a given good as the numéraire will produce asymmetry in the optimum Nash equilibrium tariff. We prove that the optimal tariff schedule is monotonically decreasing in our relative bloc size, and that the world welfare increases with our new relative bloc size as the latter grows beyond the lowest-welfare pessimal number, which is rather small by our simulations. Though confined to symmetric trading blocs, this paper fortifies the analytical foundation of Krugman's model. In some sense, it reinforces Kemp–Wan–Shimomura's and Ohyama–Panagariya–Krishna's results with the provisos that countries are symmetric and interact mutually in a symmetric fashion without a compensation scheme. It strengthens the case of regionalism as a stepping stone (building bloc) toward a complete world economic integration.

Suggested Citation

  • Chang, Winston W. & Chen, Tai-Liang & Saito, Tetsuya, 2021. "Formation of symmetric free-trade blocs, optimal tariff structure, and world welfare," Journal of Asian Economics, Elsevier, vol. 77(C).
  • Handle: RePEc:eee:asieco:v:77:y:2021:i:c:s1049007821001020
    DOI: 10.1016/j.asieco.2021.101373
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    References listed on IDEAS

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    1. Anne O. Krueger, 1999. "Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 105-124, Fall.
    2. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-519, September.
    3. Srinivasan, T.N. & Kletzer, K., 1994. "Price Normalization and Equilibria in General Equilibrium Models of International Trade Under Imperfect Competition," Papers 710, Yale - Economic Growth Center.
    4. Ethier, Wilfred J, 1998. "The New Regionalism," Economic Journal, Royal Economic Society, vol. 108(449), pages 1149-1161, July.
    5. repec:bla:reviec:v:8:y:2000:i:4:p:619-33 is not listed on IDEAS
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    Cited by:

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    2. Böhm, Volker, 2022. "The Role of Price Normalization in Imperfectly Competitive Economies," Center for Mathematical Economics Working Papers 673, Center for Mathematical Economics, Bielefeld University.

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    More about this item

    Keywords

    Symmetric free-trade blocs; Bloc size; Pessimal number; Nash tariff equilibrium; Economic integration;
    All these keywords.

    JEL classification:

    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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