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The Formation of Global Free Trade Agreement

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  • Akira Okada
  • Yasuhiro Shirata

Abstract

We investigate the formation of Free Trade Agreement (FTA) in a competing importers framework with $n$ countries. We show that (i) FTA formation causes a negative externality to non-participants, (ii) a non-participant is willing to join an FTA, and (iii) new participation may decrease the welfare of incumbent participants. A unique subgame perfect equilibrium of a sequential FTA formation game does not achieve global free trade under an open-access rule where a new applicant needs consent of members for accession, currently employed by many open regionalism agreements including APEC. We further show that global FTA is a unique subgame perfect equilibrium under an open-access rule without consent.

Suggested Citation

  • Akira Okada & Yasuhiro Shirata, 2021. "The Formation of Global Free Trade Agreement," Papers 2103.16118, arXiv.org, revised Mar 2021.
    • Handle: RePEc:arx:papers:2103.16118
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    References listed on IDEAS

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