Why are Trade Agreements Regional?
48 Pages Posted: 28 Jun 2007
Date Written: June 2007
This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries, a familiar problem of coordination failure arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.
Keywords: Coalition, Coordination, Trade Liberalization, Trade Agreement, Regionalism
JEL Classification: F02, F13, F15, C73
Suggested Citation: Suggested Citation
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