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On the different geographic characteristics of Free Trade Agreements and Customs Unions

Author

Listed:
  • James Lake

    (Southern Methodist University)

  • Halis M. Yildiz

    (Ryerson University)

Abstract

Casual observation reveals a striking phenomenon of Preferential Trade Agreements (PTAs) : while Customs Unions (CUs) are only intra-regional, Free Trade Agreements (FTAs) are inter and intra-regional. Using a farsighted dynamic model, we endogenize the equilibrium path of PTAs among two close countries and one far country. Rising transport costs mitigate the cost of discrimination faced by the far country as a CU non-member and diminish the value of preferential access as a CU member. Thus, sufficiently large transport costs imply an FTA is the only type of PTA that can induce the far country's participation in PTA formation. Unlike CU formation, FTA formation can induce participation because FTAs provide a flexibility benefit an FTA member can form further PTAs with non-members but a CU member must do so jointly with all existing members. Hence, in equilibrium, CUs are intra-regional while FTAs are intra- and inter-regional.

Suggested Citation

  • James Lake & Halis M. Yildiz, 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Departmental Working Papers 1603, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1603
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    References listed on IDEAS

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    More about this item

    Keywords

    Free Trade Agreement; Customs Union; flexibility; coordination; geography; networks; farsighted;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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