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Preferential Trade and Welfare with Differentiated Products

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  • Denise Eby Konan

    (Department of Economics, University of Hawaii at Manoa and University of Hawaii Economic Research Organization)

  • Keith E. Maskus

    (Department of Economics, University of Colorado at Boulder)

Abstract

We consider analytically and numerically the welfare tradeoffs inherent in a preferential trade area (PTA) with products differentiated by region of origin. For a small open economy in such a setting, welfare gains are associated with higher trade volumes within the PTA. However, welfare losses are induced by declining tariff revenues on trade with nonmember countries. We show that both effects are concave, while one is a non-monotonic and the other a potentially non-monotonic function of pre-PTA partner trade shares. Therefore, the relationship between initial partner import shares and direct static welfare impacts of a PTA are theoretically ambiguous. This finding contrasts with conventional results in the homogeneous-goods case, whereby the smaller is the pre-agreement trade volume with a potential partner the more beneficial is a PTA.

Suggested Citation

  • Denise Eby Konan & Keith E. Maskus, 2011. "Preferential Trade and Welfare with Differentiated Products," Working Papers 2011-8, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    • Handle: RePEc:hae:wpaper:2011-8
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    References listed on IDEAS

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    1. Eric W. Bond & Raymond G. Riezman & Constantinos Syropoulos, 2013. "A strategic and welfare theoretic analysis of free trade areas," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 8, pages 101-127, World Scientific Publishing Co. Pte. Ltd..
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    4. Chen, Maggie Xiaoyang & Joshi, Sumit, 2010. "Third-country effects on the formation of free trade agreements," Journal of International Economics, Elsevier, vol. 82(2), pages 238-248, November.
    5. Raymond RIEZMAN, 2013. "A 3 × 3 Model of Customs Unions," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 1, pages 7-20, World Scientific Publishing Co. Pte. Ltd..
    6. Kowalczyk, Carsten, 2000. "Welfare and Integration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 483-494, May.
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    Cited by:

    1. Denise Eby Konan & Keith E Maskus, 2000. "Bilateral Trade Patterns and Welfare: An Egypt-EU Preferential Trade Agreement," Working Papers 200001, University of Hawaii at Manoa, Department of Economics.
    2. Benjamin Bridgman & Michael Maio & James A. Schmitz, 2012. "What ever happened to the Puerto Rican sugar manufacturing industry?," Staff Report 477, Federal Reserve Bank of Minneapolis.

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    More about this item

    Keywords

    preferential trade agreements; differentiated products;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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