Endogenous Preferential Trade Agreements

This paper shows that preferential trade agreements can emerge in an endogenous way. We use a simple international trade model where govern - ments fix their tariffs in order to maximize social welfare. We find that when countries behave in a non co-operative way this performance leads to tariff dis - crimination. This result holds whether firms play a Cournot strategy or whether they follow a Stackelberg’s leader-follower strategy. This paper also analyzes whether multilateralism and regionalism are complementary or sub - stitutive processes. It is concluded that, in spite of the fact that absolute protec - tion is reduced as a result of the economic integration process, relative protec - tion against the rest of the world increases and, therefore, the two processes should not be considered as complementary.