Tariffs and Formation of Free Trade Agreements Networks

27 Pages Posted: 7 Jun 2020

See all articles by Jung Hur

Jung Hur

Sogang University

Larry D. Qiu

The University of Hong Kong - Faculty of Business and Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: January 2020

Abstract

This paper examines the formation of bilateral free trade agreements (FTAs) on the basis of country heterogeneity in the tariff level. We demonstrate that a country's unilateral incentive to form an FTA depends on the relative magnitudes of the (negative) market concession effect and the (positive) market expansion effect, both of which are determined by the tariff levels of the two FTA partner countries. Global welfare is maximised when all country pairs form FTAs. Two countries in equilibrium are more likely to form an FTA when their tariff gap is smaller or when their tariff levels are neither very high nor very low. This finding is robust to several extensions of the model. Our preliminary empirical analysis provides some evidence for the finding.

Keywords: free trade agreement, FTA formation, FTA incentive, FTA network, global welfare, tariff

Suggested Citation

Hur, Jung and Qiu, Larry Dongxiao and Qiu, Larry Dongxiao, Tariffs and Formation of Free Trade Agreements Networks (January 2020). The World Economy, Vol. 43, Issue 1, pp. 33-59, 2020, Available at SSRN: https://ssrn.com/abstract=3621009 or http://dx.doi.org/10.1111/twec.12868

Jung Hur (Contact Author)

Sogang University ( email )

Larry Dongxiao Qiu

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

School of Economics and Finance
University of Hong Kong
Pokfulam
Hong Kong

HOME PAGE: http://www.bm.ust.hk/~larryqiu/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
91
PlumX Metrics