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External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements

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  • Paul Missios

    (Ryerson University)

  • Kamal Saggi

    (Vanderbilt University)

  • Halis Murat Yildiz

    (Ryerson University)

Abstract

In a game of endogenous trade agreements between three countries, we show that while the pursuit of customs unions (CUs) prevents global free trade from emerging as a coalition-proof Nash equilibrium, the pursuit of free trade agreements (FTAs) does not. This result reflects the relatively flexible nature of FTAs: whereas each FTA member can independently undertake further trade liberalization with respect to the non-member, CU members must do so as a group due to their common external tariff. By diverting members' exports away from the non-member, both types of trade agreements induce the non-member to voluntarily lower its import tariffs.

Suggested Citation

  • Paul Missios & Kamal Saggi & Halis Murat Yildiz, 2015. "External Trade Diversion, Exclusion Incentives and the Nature of Preferential Trade Agreements," Vanderbilt University Department of Economics Working Papers 15-00011, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-sub-15-00012
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    References listed on IDEAS

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    More about this item

    Keywords

    Free Trade Agreement; Customs Union; Hub and Spoke Agreements; Free Trade; Optimal Tariffs;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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