WHY A FREE TRADE AREA? THE TARIFF ALSO RISES*

This paper considers the choice between a customs union (wherein partners share a common external tariff) and a free trade area (wherein each partner chooses its own tariff against non-members). Following the result that a customs union dominates a free trade area, with coordination of domestic tax policies, we show that a free trade area may nevertheless be chosen if tariffs are determined endogenously through industry lobbying. This is so even when the free trade area equates producer prices within its borders and induces tariff revenue competition and whether or not there is domestic free-riding in lobbying.     

How reasonable are assumptions used in theoretical models? Computational evidence on the likelihood of trade pattern changes

Abstract .  In theoretical literature it is common to make the assumption that in a multi-country, multi-good world, the direction of trade (import and export by commodity) is predetermined and fixed for each good for each country. We consider a simple three-country, three-good, pure-exchange model with CES preferences. We compute free trade competitive equilibria, three-country non-cooperative Nash equilibria, and customs union equilibria for randomised parameterizations, and find that trade pattern changes between free trade and customs union equilibria in around 35% of cases.     

Gains from trade with overlapping generations

Summary This paper examines the welfare effects of international trade in a context of overlapping generations. It shows that, for a single trading country, uncompensated free trade may be Pareto inferior to autarky. However, for each government there are compensation schemes which guarantee welfare improvements for all local individuals when free trade is allowed, or when for a small open economy the terms of trade improve or the number of tradable goods increases, or when a customs union is formed.We acknowledge with gratitude the probing comments of Henry Y. Wan, Jr. and two anonymous referees.     

Does free trade promote environmental technology transfer?

We investigate how environmental and trade policies affect the transfer of environmental technology in a two-country model with global pollution. By comparing free trade and tariff policy with or without commitment, the following results are obtained. First, firms avoid the implementation of environmental tax by contracting technological transfer. Second, there is a case in which free trade is preferable to a tariff policy for both countries when there is no commitment to a tariff level. Third, free trade is not Pareto-preferred to a tariff policy when there is a commitment.     

Customs Union or Free Trade Area? The Role of Political Asymmetries

When trade policy is determined endogenously by lobbying, it matters whether countries are arranged into a customs union or a free trade area. This paper compares the two regimes when the member governments are asymmetric in their susceptibilities to lobbying and in their bargaining power within a customs union. In the model, a customs union never leads to lower tariffs for both countries, whereas it can lead to higher tariffs for both.     

Exchanging market access at the outsiders' expense: the case of customs unions

Abstract.  Under a customs union, countries can exchange preferential market access by coordinating external tariffs to shift profits from excluded countries. I show that the exporting rents resulting from this coordination can offset trade diversion losses produced by the union, even if its members are relatively small in world markets. Such gains come, however, at the expense of excluded countries. I show that small countries can use customs unions also to foster multilateral cooperation, by increasing the incentives of excluded countries to support global free trade.     

Pareto‐optimal Delegation in Customs Unions*

Customs unions constitute agreements to engage in free intra‐union trade and to levy common external tariffs on trade with nonmembers. Existing theoretical models do not agree on how the common external tariffs are chosen. In this paper, a model of customs union formation is developed in which the Pareto principle and the assumption of unanimity are used to construct a mechanism for the choice of common external tariffs. The model is structured as a three‐stage game in which union members select common external tariffs yielding utility outcomes that are Pareto optimal and dominate the standalone alternative. Numerical examples demonstrate the wide range in the nature of these outcomes. Our results are discussed in relation to the delegation principle developed by Gatsios and Karp and to modeling approaches reported in the customs union literature. The paper emphasizes the importance of modeling the formation of the customs union agreement.     

西方关税同盟贸易效应的理论与实证研究

关税同盟理论是西方区域经济一体化理论的核心。区别于现有关税同盟的综述文章,作者将目前西方探讨关税同盟贸易效应的观点按照逻辑关系分成三个方面进行阐述:其一是关税同盟的利益来源;其二是关税同盟的产生原因;其三是最优对外关税的决定。本文也归纳了西方对关税同盟贸易效应进行经验分析的常用方法,并对已有的理论和实证观点进行评价。     

PREFERENTIAL TRADE AGREEMENTS AND MULTILATERAL TARIFF COOPERATION*

Are preferential trade agreements (PTAs) building or stumbling blocks for multilateral trade liberalization? I address this question in an infinitely repeated tariff game between three countries engaged in intraindustry trade under oligopoly. The central result is that when countries are symmetric, a free trade agreement (FTA) undermines multilateral tariff cooperation by adversely affecting the cooperation incentive of the nonmember whereas a customs union (CU) does so via its effect on the cooperation incentives of members. However, when countries are asymmetric with respect to either market size or cost, there exist circumstances where PTAs facilitate multilateral tariff cooperation.     

Equilibrium Unemployment Rate and Customs Union

This paper utilizes the macroeconomics concept of the equilibrium rate of unemployment for theorems on free trade and the formation of customs union. The notion of an equilibrium rate of unemployment appears in the literature on labour, macroeconomics, business cycles and trade theory. Such an equilibrium rate can be derived in a number of ways, for example, by introducing labor–leisure choice in the utility functions of the workers; a labor turnover model and/or by introducing shirking. We extend the two sector-two factor Heckscher–Ohlin–Samuelson model for a small open economy by relaxing the assumption of inelastic labor supply. Specifically, we consider the classical labor supply function obtained from the representative consumer's utility maximisation problem. This consideration allows for the existence of unemployment and we analyse the effects trade policies have on the equilibrium unemployment rate. Given the movement towards free trade (either via the implementation of GATT and/or formation of customs union) it is important to examine its implications for the equilibrium rate of unemployment.     

Gains from Trade versus Gains from Migration: What Makes Them So Different?

Would unrestricted “economic” migration enhance the potential gains from free trade? With free migration, consumers' feasible sets become non‐convex. Under standard assumptions, however, Walrasian equilibrium exists for a continuum of individuals with dispersed ability to afford each of a finite set of possible migration plans. Then familiar conditions ensuring potential Pareto gains from trade also ensure that free migration generates similar supplementary gains, relative to an arbitrary status quo. As with the gains from customs unions, however, wealth may have to be redistributed across international borders.     

FTA关系网络的第三国效应研究进展

随着自由贸易协定的蓬勃发展,出现一个国家(区域)与多个国家(区域)分别缔结自由贸易协定的重叠现象,学术界开始关注多个自由贸易协定与关税同盟共存下的关系网络。通过梳理学术界关于自由贸易协定的主要研究和当前关注热点,以期对该领域的进一步研究有所裨益。     

Trade in intermediate inputs,customs unions,and global free trade

In a three‐country customs union (CU) formation game, I introduce international trade in intermediate inputs and rules of origin (RoO) restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, global free trade is less likely to be a stable equilibrium outcome. RoO can help solve this problem. In the case of asymmetry, depending on the degree of the globalization, free riding (for high degree) or exclusion motive (for low degree) prevents global free trade. Correspondingly, I show that RoO can have helpful or detrimental effects on attaining global free trade.     

Small Countries and Preferential Trade Agreements: How Severe is the Innocent Bystander Problem?

In this paper the welfare implications of preferential trade agreements (PTA) are examined from the perspective of small countries in the context of a multi-country general equilibrium model. We calibrate our model to represent one relatively small country and two symmetric big countries. We consider two cases. In one case, the small country is an 'innocent bystander', that is, it is left out of a PTA between the two large countries. In the second case, the small country signs a PTA with one of the large countries. We simulate the model and calculate consumption allocations, prices, trade volume, and tariffs in these two cases considering three different equilibria: free trade (FT), free trade association (FTA) and customs union (CU). We find that free trade is the best outcome for the small country. If the large country PTA takes the form of a CU then the cost of being an 'innocent bystander' is very large. If it is an FTA then the cost of being an 'innocent bystander' is relatively modest. In fact, the small country prefers to be an 'innocent bystander' to being a member of an FTA with one of the large countries.     

Multilateralism and Hub‐and‐Spoke Bilateralism*

This paper studies sequential negotiations of bilateral free‐trade agreements in an oligopoly model. The expansion of trading blocs through overlapping trade agreements allows the option of hub‐and‐spoke systems and achieves multilateral free trade as the equilibrium path, even if the expansion of trading blocs through the acceptance of new members is not feasible. The results suggest that free‐trade areas (FTAs) tend to expand more than customs unions (CUs). Lobbying by a producer can either promote or undermine the achievement of multilateral free trade through overlapping FTAs.     

Comecon: A “Trade-Destroying” Customs Union?

In traditional theory the nations forming a customs union reduce barriers among themselves but maintain tariffs against nonmembers at the pre-customs-union level. This leads to trade creation and/or trade diversion. It is argued here that the formation of Comecon led to trade destruction and that this resulted because the members of Comecon were poorly suited to trade with each other and increased significantly barriers to trade with nonmembers. Thus trade with nonmembers that could not be replaced at low-enough cost at home or by member trading partners was eliminated.     

Incentives to Form Customs Unions and Quotas

This paper extends the well known Kemp–Wang proposition regarding customs unions and tariffs to the case of import quotas. It is shown that a customs union in the presence of import quotas will leave each country, whether a member of the customs union or not, not worse off than before the formation of the customs union. The partial-equilibrium approach is used in this study.     

How much do tariffs matter? Evidence from the customs union of Belarus,Kazakhstan and Russia

This paper provides an empirical analysis of the early impact of the formation of the customs union of Belarus, Kazakhstan and Russia, and associated changes in import schedules on the structure of imports. Relying on an original data-set of statutory tariffs we find that trade creation effects were significant only in trade between Russia and third countries, but that there was some trade destruction, with a significant negative impact on imports from China to Kazakhstan and Russia, and on imports from the EU to Belarus. However, the magnitude of this effect is relatively small, suggesting that the benefits of the new tariff policy per se are limited at best.     

Preferential Liberalization,Antidumping, and Safeguards: Stumbling Block Evidence from MERCOSUR

There is not yet consensus in the trade agreements literature as to whether preferential liberalization leads to more or less multilateral liberalization. However, research thus far has focused mostly on tariff measures of import protection. We develop more comprehensive measures of trade policy that include the temporary trade barrier (TTB) policies of antidumping and safeguards; studies in other contexts have also shown how these policies can erode some of the trade liberalization gains that arise when examining tariffs alone. We examine the experiences of Argentina and Brazil during the formation of the MERCOSUR over 1990–2001, and we find that an exclusive focus on applied tariffs may lead to a mischaracterization of the relationship between preferential liberalization and liberalization toward non‐member countries. First, any “building block” evidence that arises by focusing on tariffs during the period in which MERCOSUR was only a free trade area can disappear once we also include changes in import protection that arise through TTBs. Furthermore, there is also evidence of a “stumbling block” effect of preferential tariff liberalization for the period in which MERCOSUR became a customs union, and this result tends to strengthen upon inclusion of TTBs. Finally, we also provide a first empirical examination of whether market power motives can help explain the patterns of changes to import protection that are observed in these settings.     

Partial Free Trade Agreements and Economic Welfare: Reconsidering GATT Article 24

This paper generalizes the Kemp–Wan theorem on the customs union to cover partial and incomplete free trade agreements emerging all over the world and elucidates the conditions which ensure that they are potentially conducive to the economic welfare of member countries without harming the rest of the world. In the light of this generalization, it also reconsiders two well‐known conditions stipulated in Article 24 of the GATT required for the formation of FTAs.