Free Trade Networks

42 Pages Posted: 11 Sep 2003

See all articles by Taiji Furusawa

Taiji Furusawa

University of Tokyo

Hideo Konishi

Boston College - Department of Economics

Date Written: June 2003

Abstract

The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider a general n-country model in which countries trade differentiated industrial commodities as well as a numeraire good. Countries may be different in the size of the industrial good industry (measure of firms) and the market size (population size). Their incentives to sign an FTA depend on these characteristics of their own countries and those of their partner countries. We show that if all countries are symmetric, a complete global free trade network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitate global trade liberalization, emphasizing the fact that unlike in the case of a CU, each country signing an FTA can have a new FTA with an outside country without consent of other member countries.

Keywords: Free trade agreement, Customs union, Global free trade, Theory of network, Pairwise stability

JEL Classification: F12, F13, F15, C71, C78

Suggested Citation

Furusawa, Taiji and Konishi, Hideo, Free Trade Networks (June 2003). FEEM Working Paper No. 55.2003. Available at SSRN: https://ssrn.com/abstract=438502 or http://dx.doi.org/10.2139/ssrn.438502

Hideo Konishi (Contact Author)

Boston College - Department of Economics ( email )

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