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Vertical trade and free trade agreements

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  • Kawabata, Yasushi
  • Yanase, Akihiko
  • Kurata, Hiroshi

Abstract

We investigate the effects of free trade agreements (FTAs) on tariffs and welfare in vertical trade. We consider a three-country model, where an FTA is formed between a country exporting a final good and a country exporting an intermediate good. The FTA unambiguously leads to a reduction in the member country's tariff, but may cause the non-member country's tariff level to increase. In the case, where FTA raises the non-member country's tariff level, the FTA increases that country's welfare. In contrast, the FTA may render its member countries better off. This result implies that the formation of an FTA may not always be Pareto-improving.

Suggested Citation

  • Kawabata, Yasushi & Yanase, Akihiko & Kurata, Hiroshi, 2010. "Vertical trade and free trade agreements," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 569-585, December.
    • Handle: RePEc:eee:jjieco:v:24:y:2010:i:4:p:569-585
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    Cited by:

    1. Archana Srivastava & Somesh Kumar Mathur & Rachna Mathur & Prabir De, 2023. "Assessment of Possible Economic Alignment Between G20 Nations with Special Focus on India, G7 and G12: A General Equilibrium Analysis," India Quarterly: A Journal of International Affairs, , vol. 79(4), pages 535-551, December.
    2. Yasushi Kawabata, 2024. "Industrial Policy and Regional Trade Agreements," Journal of Industry, Competition and Trade, Springer, vol. 24(1), pages 1-27, December.
    3. Kawabata, Yasushi, 2015. "Endogenous formation of free trade agreements in vertically related markets," Research in Economics, Elsevier, vol. 69(2), pages 214-223.
    4. Yasushi Kawabata, 2014. "The effects of cross-regional free trade agreements under a vertical industry structure," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(6), pages 906-922, September.
    5. Huria, Sugandha, 2020. "Gains from Free Trade Agreements: A Theoretical Analysis," MPRA Paper 109815, University Library of Munich, Germany.

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