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Preferential trade liberalization with endogenous cartel discipline: Implications for trade and welfare

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  • Delina E. Agnosteva
  • Constantinos Syropoulos
  • Yoto V. Yotov

Abstract

We consider an international cartel whose members interact repeatedly in their own as well as in third‐country markets. Cartel discipline—an inverse measure of the degree of competition between firms—is endogenously determined by the cartel's incentive compatibility constraint, which strategically links markets that are otherwise independent. This linkage implies that trade cost reductions induce cartel members to adjust their sales, not only because of direct but also because of spillover effects. We apply these ideas to preferential trade agreements and show that the indirect effects can give rise to trade diversion. We also characterize the welfare effects of preferential tariff cuts for all countries and identify circumstances under which preferential trade liberalization is welfare‐reducing. Libéralisation des échanges préférentiels et discipline endogène du cartel : Conséquences pour le commerce et la prospérité. Nous considérons un cartel international dont les membres interagissent de façon répétée dans leur marché ainsi que dans des marchés de pays tiers. La discipline du cartel — une mesure inverse du degré de concurrence entre les entreprises — est déterminée de façon endogène par les contraintes de compatibilité incitative du cartel, qui lie des marchés stratégiques qui ne sont pas liés autrement. En raison de ce lien, les réductions du coût du commerce incitent les membres du cartel à ajuster leurs ventes, non seulement en raison des effets directs, mais aussi en raison des effets de débordement. Nous appliquons ces idées à des accords commerciaux préférentiels et démontrons que les effets indirects peuvent donner lieu à un détournement du commerce. Nous caractérisons aussi les effets sur la prospérité découlant des réductions des tarifs préférentiels pour tous les pays et déterminons les circonstances où la libéralisation des échanges préférentiels réduit la prospérité.

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  • Delina E. Agnosteva & Constantinos Syropoulos & Yoto V. Yotov, 2024. "Preferential trade liberalization with endogenous cartel discipline: Implications for trade and welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(4), pages 1109-1136, November.
  • Handle: RePEc:wly:canjec:v:57:y:2024:i:4:p:1109-1136
    DOI: 10.1111/caje.12735
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