Hub-and-Spoke Free Trade Areas

37 Pages Posted: 3 Jan 2007

See all articles by George Deltas

George Deltas

University of Illinois at Urbana-Champaign - Department of Economics

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Giovanni Facchini

Tinbergen Institute

Date Written: November 2006

Abstract

This paper analyzes how the sequential formation of free trade areas affects the volume of trade between member countries. In a three-country, three-good model, if two countries have a free trade area, and both sign a similar agreement with the third, trade between the two decreases, and welfare rises in both. However, if only one of them signs an FTA with the third, a hub-and-spoke pattern arises. If the two spokes have a comparative advantage in different goods, trade between the two countries in the initial FTA increases, with welfare rising in the hub and falling in the spoke. We provide evidence consistent with the theoretical model when studying the experience of Israel.

Keywords: Hub-and-spoke, free trade areas, trade volumes, Israel

JEL Classification: F11, F13

Suggested Citation

Deltas, George and Desmet, Klaus and Facchini, Giovanni, Hub-and-Spoke Free Trade Areas (November 2006). CEPR Discussion Paper No. 5960. Available at SSRN: https://ssrn.com/abstract=954760

George Deltas

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
450 Commerce West
Champaign, IL 61820
United States
217-333-4586 (Phone)
217-244-6678 (Fax)

Klaus Desmet (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanni Facchini

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://paople.few.eur.nl/facchini

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