FREE TRADE NETWORKS WITH TRANSFERS*

We investigate the network of bilateral free trade agreements (FTAs) in the context of a network formation game with transfers. In a previous paper we showed that without international transfers countries with different industrialization levels cannot sign an FTA, so that the global free trade network, in which every pair of countries signs an FTA, is not in general pairwise‐stable. In this paper we show that, even if the world consists of fairly asymmetric countries, the global free trade network is pairwise‐stable when transfers between FTA signatories are allowed. Moreover, it is a unique pairwise‐stable network unless industrial commodities are highly substitutable.     

The Division and Size of Gains from Liberalization in Service Networks*

If two disjoint country service networks involving a small and large country are connected as part of international liberalization in the presence of network externalities, the per capita gain for the small country from access to a large network will be large, and the per capita gain for the large country will be small. In contrast to goods, the benefits of liberalization in network‐related services are more likely to be approximately equally divided between large and small countries than is true of trade in goods, where benefits accrue disproportionately to the small country. We also argue that non‐cooperation in network‐related services trade may involve more extreme retaliation than suggested for trade in goods by the optimal tariff literature, so that relative to a non‐cooperative outcome, gains from liberalization in network‐related services become larger than from liberalization in goods. We develop simple models which we use for numerical examples showing these points, along with an empirical implementation for global telecoms liberalization for the US, Europe, Canada, and the rest of the world using the framework developed in the paper. This shows similar proportional gains to regions, consistent with the theme of the paper that goods and services liberalization differ.     

International R&D Networks

This paper considers the Goyal and Moraga‐Gonzalez (2001 ) model of strategic R&D collaboration networks in the open economy framework. The R&D is the d'Aspremont and Jacquemin (1988 ) process innovation and collaboration takes the form of research joint ventures (RJV) in which firms cooperate in R&D but compete in product markets. Countries decide whether to establish free‐trade links while firms decide whether and with whom to form RJVs. A double‐layer pairwise stability concept is introduced to characterize equilibrium network structures. In contrast with conventional wisdom, it is shown that global free trade generally reduces collaborative R&D levels. We give conditions for which pairwise stable R&D networks are welfare maximizing. Stability and efficiency are congruent when R&D cost is either too high or too low. A large public spillover effect is detrimental to an R&D network when trade networks are regional.     

The Distributional and Allocative Impacts of Virtual Labor Mobility across Time Zones through Communication Networks

Using a specific‐factors' model, with two goods (a shift‐working good and a non‐shift‐working good), three factors (capital specific to shift‐working, land specific to non‐shift‐working and labor) and two countries (Home and Foreign), which are located in different time zones, we highlight the impact of trade in labor services via communication networks on factor prices and production patterns. If two countries are identical in size, then under free trade in labor services, all workers work only in their local daytime, and night shift in each country is performed by imported labor services supplied by residents of the other country in their local daytime. Night‐time wage becomes the same as daytime wage (a wage equalization result). Other factor prices are also equalized. In both countries, capital rental rate increases, while land rent decreases. However, if two countries are different in size, trade in labor services does not equalize wages: in the large country, wages for night‐shift workers are higher than daytime wages and some residents work at night; in the small country, daytime wages become higher than night‐time wages and no one works at night, and night‐shift work is done by imported labor services from the large country. Land rent in the small country decreases. Land rent in the large country may or may not decrease, but it is always higher than in the small country. Capital rental rates in both countries are equalized and increase.     

Dynamic Free Trade Networks: Some Numerical Results

To help predict whether the proliferation of free trade agreements (FTAs) continues until global free trade is effectively attained, this paper investigates dynamic paths of FTAs, generated by numerical simulations of a model of an FTA network formation game with many countries. The characteristics of the final FTA network naturally depend on how the proposer of an FTA is chosen in each period. The paper finds that if the country that has the largest incentive to form an FTA is chosen as a proposer in each period, the network evolution always leads to a unique final FTA network, which may or may not be the complete network of FTAs. FTA networks often evolve to a partition of the world into a small number of groups of asymmetric size owing to the negative network externality caused by preference erosion.     

On the International Linkages between Trade and Merger Policies*

In a three‐country model, this paper investigates linkages between merger incentives of exporting firms and the trade policy of an importing country. When exporting firms come from only one country, the tariff response of the importing country reverses the welfare effects of a merger in the exporting country. If there exist two exporting countries, a merger creates two types of conflicting international externalities. First, a merger in one exporting country increases profits of all firms. Secondly, non‐merged firms lose if the importing country is free to raise its tariff in response to a merger of foreign exporters.     

Barriers to Global Free Trade through Bilateral Agreements

This paper examines the formation of bilateral free trade agreements (FTAs) in the context of a dynamic noncooperative bargaining game with a random proposer. We show that global free trade (a grand coalition) does not necessarily occur unless transfer payments among countries are allowed. When transfer payments are possible, bilateral FTAs always achieve global free trade, but the ex‐ante and ex‐post inequalities of social welfare among countries are larger than those when all countries are independent because of the strategic bargaining behavior.     

The Location of Firms in Unionized Countries*

This paper develops a two‐country economic geography model with Cournot competition, where the labor markets are unionized so that trade unions bargain efficiently with each firm over wages and employment. Agglomeration forces are present due to wage premia obtained by the trade unions. It is shown that if the bargaining power of unions differs across countries then, as trade costs are reduced, the country with relatively weak unions gradually acquires all firms. However, for a range of trade costs, it is also a locally stable equilibrium for all firms to locate in the country with strong unions.     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.     

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.     

Free Trade Agreement and Vertical Trade with a Manufacturing Base

We examine the effects of free trade agreement (FTA) on tariffs and welfare in a three‐country model with vertical trade, where an FTA is formed between a country exporting a final good whose production involves using an intermediate good, and a country exporting the intermediate good in exchange for the final good. We demonstrate that the FTA reduces its member country's external tariff, whereas it raises the non‐member country's tariff. The non‐member country unambiguously becomes better off. In contrast, the FTA may or may not make its member countries better off. This implies that the formation of an FTA may not always be Pareto‐improving.     

Farsightedly stable networks

A set of networks G is pairwise farsightedly stable (i) if all possible farsighted pairwise deviations from any network g G to a network outside G are deterred by the threat of ending worse off or equally well off, (ii) if there exists a farsighted improving path from any network outside the set leading to some network in the set, and (iii) if there is no proper subset of G satisfying conditions (i) and (ii). A non-empty pairwise farsightedly stable set always exists. We provide a full characterization of unique pairwise farsightedly stable sets of networks. Contrary to other pairwise concepts, pairwise farsighted stability yields a Pareto dominant network, if it exists, as the unique outcome. Finally, we study the relationship between pairwise farsighted stability and other concepts such as the largest pairwise consistent set and the von Neumann–Morgenstern pairwise farsightedly stable set.     

Trade and Global Pollution in Dynamic Oligopoly with Corporate Environmentalism

This paper examines the effects of international trade in the presence of dynamic oligopolistic competition where the stock of global pollution has a negative welfare effect and the oligopolists' objectives may include society's pollution damage as well as private profits. In a symmetric case where the number of firms, emission coefficient, and firms' environmental consciousness are the same in two countries, an opening of trade unambiguously improves each country's welfare in the short run. In the long run, however, trade increases the stock of global pollution and hence, whether opening of trade is beneficial depends on the parameters of the economy. If there are asymmetries between countries, the short‐run gains from trade in both countries are not necessarily guaranteed, because trade liberalization may increase output in one country and reduce it in the other. Moreover, free trade may result in lower pollution stock than under autarky.     

The effects of labour unions on international capital tax competition

Abstract We analyze the impact of labour market rigidities on tax competition between two imperfectly integrated countries. Following a shift from a competitive to a unionized labour market in both countries, the capital tax can be adjusted upward in the country with the less rigid labour market, whereas the capital tax is always adjusted downward in the other country. Moreover, by reducing the labour cost differential between countries, trade liberalization gives rise to tax and welfare convergences. Finally, when a country adopts a flexible labour market, the unionized country may attract the majority of capital.     

Pecking order and core‐periphery in international trade

This paper analyzes the impact of market size and trade costs on bilateral trade flows. A multi‐country trade model with firm‐level heterogeneity in productivities and countries’ market potential provides a simple micro foundation for the link between these variables. In the model, market size and trade costs jointly determine a country‐specific pecking order of exporters serving their destination countries. In a counterfactual setting where bilateral trade costs are homogeneous across country pairs, market size predicts a common ranking of exporters among destination countries. This leads to a unique core‐periphery structure of the world trade network. With heterogeneous trade costs, we illustrate the impact of market size and trade costs on bilateral trade flows and its margins in a simple gravity‐like setting. Using an instrumental variables approach, we find that both market size and trade costs (measured through the network position of countries) have a significant impact on bilateral exports: countries in the core bilaterally trade more with other countries in the core than with peripheral countries, conditional on typical observables.     

Forming Efficient Free‐Trade Networks: A Sequential Mechanism

This paper considers a sequential network formation game, whose subgame‐perfect equilibrium can generate an efficient and complete network as the equilibrium outcome, thereby achieving global free trade. Our result shows that bilateral free‐trade agreements can be compatible with global free trade.     

An Inframarginal Analysis of the Ricardian Model

This paper shows that a 2 × 2 Ricardian model has a unique general equilibrium, and the comparative statics of the equilibrium involve discontinuous jumps. If partial division of labor occurs in equilibrium, the country producing both goods would impose a tariff, whereas the country producing a single good would prefer unilateral free trade. If complete division of labor occurs in equilibrium, both countries would negotiate to achieve free trade. In a model with three countries, the country which does not have a comparative advantage relative to the other two countries, and/or which has low transaction efficiency, may be excluded from trade.     

International trade and directed search unemployment in general equilibrium

We develop an open economy general equilibrium model, with auction‐based directed search unemployment, to study the interactions of trade and unemployment. The theory ascribes all outcomes purely to the fundamentals of technology and endowment. If countries differ by endowment, trade makes both the unemployment rate and the rental in the capital‐(labour‐) abundant country rise (decline) but does not lead to equalization. If, alternatively, countries differ by technology, trade increases (decreases) the unemployment rate in the country whose technology is relatively superior (inferior) for producing the capital‐intensive good.     

BILATERALISM AND FREE TRADE*

We study a setting with many countries; in each country there are firms that can sell in the domestic as well as foreign markets. Countries can sign bilateral free‐trade agreements that lower import tariffs and thereby facilitate trade. We allow a country to sign any number of bilateral free‐trade agreements. A profile of free‐trade agreements defines the trading regime. Our principal finding is that, in symmetric settings, bilateralism is consistent with global free trade. We also explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements.     

Labour unions and multi‐product firms in closed and open economies

Abstract This paper sets up a general oligopolistic equilibrium model with multi‐product firms and union wage setting. In this model, we conduct two policy experiments. First, we show that deunionization induces a general decline in firm scale and scope, the respective reduction being more pronounced in non‐unionized industries. Second, we study the consequences of trade liberalization, and show that access to foreign markets lowers firm scope in all industries as well as the scope differential between unionized and non‐unionized firms. Adjustments in firm scale turn out to be less clear‐cut and, inter alia, depend on the degree of product differentiation.