Hierarchical Free Trade Agreements as Pairwise Stable Networks I

This paper investigates why hierarchical free trade agreement networks emerges and persists, using the theory of pairwise stable networks. We set up a simplen-country trade model where countries are ranked by their MFN (most favored nation) tari levels. First, we show that when parsimonious numbers of boundary conditions for bilateral FTA formations are satised, a hierarchical network of FTAs arises for any arbitrary numbers of countries. Second, we extend this result to hierarchical blocs of the FTA network. Third, we also identify conditions under which some FTA networks can be isolated without a connection to the rest of the world. This paper contributes to the theoretical literature on the endogenous formation of FTA networks among heterogeneous countries.