On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

This paper compares equilibrium outcomes of two games of trade liberalization. In the Bilateralism game, countries choose whether to liberalize trade preferentially via a customs union (CU ), multilaterally, or not at all. The Multilateralism game is a restricted version of the Bilateralism game in that countries cannot form CUs and can only undertake non-discriminatory trade liberalization. When countries have symmetric endowments, global free trade is the only stable equilibrium of both games. Allowing for endowment asymmetry, we isolate circumstances where the option to form CUs helps further the cause of multilateral liberalization as well as where it does not. (JEL F12, F13)

[1]  Kamal Saggi,et al.  Bilateralism, multilateralism, and the quest for global free trade , 2010, World Scientific Studies in International Economics.

[2]  Daniel J. Seidmann.  Preferential trading arrangements as strategic positioning , 2009 .

[3]  Monika Mrázová,et al.  Is the WTO's Article XXIV Bad? , 2009 .

[4]  E. Ornelas,et al.  Does Regionalism Affect Trade Liberalization toward Non-Members? , 2008 .

[5]  Mark Melatos,et al.  Pareto-Optimal Delegation in Customs Unions , 2007 .

[6]  A. Woodland,et al.  Endogenous trade bloc formation in an asymmetric world , 2007 .

[7]  Kamal Saggi.  Preferential Trade Agreements and Multilateral Tariff Cooperation , 2006, World Scientific Studies in International Economics.

[8]  E. Ornelas.  Rent Destruction and the Political Viability of Free Trade Agreements , 2005 .

[9]  Eric W. Bond,et al.  A Strategic and Welfare Theoretic Analysis of Free Trade Areas , 2004 .

[10]  P. Aghion,et al.  Negotiating Free Trade , 2004 .

[11]  Costas Hadjiyiannis.  Regionalism and Multilateral Trade Liberalization with Asymmetric Countries , 2004 .

[12]  E. Ornelas.  Trade Creating Free Trade Areas and the Undermining of Multilateralism , 2003 .

[13]  Constantinos Syropoulos.  Rules for the disposition of tariff revenues and the determination of common external tariffs in customs unions , 2003 .

[14]  Hideo Konishi,et al.  Free Trade Networks , 2003 .

[15]  A. Woodland,et al.  Non-Preferential Trading Clubs , 2002, SSRN Electronic Journal.

[16]  C. Freund.  Multilateralism and the endogenous formation of preferential trade agreements , 2000 .

[17]  Sanjeev Goyal,et al.  Bilateralism and Free Trade , 1999 .

[18]  Raymond Riezman,et al.  Can Bilateral Trade Agreements Help Induce Free Trade , 1999 .

[19]  K. Bagwell,et al.  The Simple Economics of Labor Standards and the GATT , 1998 .

[20]  Pravin Krishna,et al.  Regionalism and Multilateralism: A Political Economy Approach , 1998 .

[21]  K. Bagwell,et al.  MULTILATERAL TARIFF COOPERATION DURING THE FORMATION OF FREE TRADE AREAS , 1997 .

[22]  K. Bagwell,et al.  Regionalism and Multilateral Tariff Cooperation , 1997 .

[23]  Sang-Seung Yi,et al.  Endogenous formation of customs unions under imperfect competition: open regionalism is good , 1996 .

[24]  Eric W. Bond,et al.  The size of trading blocs Market power and world welfare effects , 1996 .

[25]  Elhanan Helpman,et al.  The Politics of Free Trade Agreements , 1993 .

[26]  K. Bagwell,et al.  Multilateral Tariff Cooperation During the Formation of Customs Unions , 1993 .

[27]  L. Karp,et al.  Delegation Games in Customs Unions , 1991 .

[28]  J. Kennan,et al.  Optimal Tariff Equilibria with Customs Unions , 1990 .

[29]  M. Whinston,et al.  Coalition-Proof Nash Equilibria I. Concepts , 1987 .

[30]  Raymond Riezman,et al.  Customs Unions and the Core , 1985 .

[31]  Phedon Nicolaides,et al.  The world trading system at risk , 1992 .

[32]  P. Krugman.  The move toward free trade zones , 1991 .

[33]  J. Bhagwati.  The world trading system at risk , 1991 .