Why are Trade Agreements Regional?

48 Pages Posted: 28 Jun 2007

See all articles by Ben Zissimos

Ben Zissimos

Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: June 2007

Abstract

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

Zissimos, Ben, Why are Trade Agreements Regional? (June 2007). FEEM Working Paper No. 67.2007, Available at SSRN: https://ssrn.com/abstract=994879 or http://dx.doi.org/10.2139/ssrn.994879

Ben Zissimos (Contact Author)

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

HOME PAGE: http://www.vanderbilt.edu/econ/cv/ZissimosCV.pdf

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