Theoretical models of trade blocs and integrated markets

Abstract

This thesis consists of four main chapters, together with a general introduction and conclusion. The thesis examines, both separately and together, the formation of trade blocs and global market integration. All the models use a partial equilibrium framework, with firms competing as Cournot oligopolists. Chapter 2 presents two models of trade bloc formation under segmented markets. In the first model, with common constant marginal costs, global free trade is optimal for all countries when there are no more than four countries, but with five or more countries there is an incentive to form a trade bloc containing most countries, but excluding at least one. The second model introduces a cost function where a firm's marginal cost is lower when it is located in a larger trade bloc, with little effect on the results. Chapter 3 analyses the formation of trade blocs between countries with different market sizes under segmented markets. The formation of a two country customs union or free trade area will always raise the smaller country's welfare, while the larger country will usually lose from a free trade area, and sometimes from a customs union. Chapter 4, which is joint work with David R. Collie and Morten Hviid, presents a model of strategic trade policy under integrated markets, under complete and incomplete information. In the former case, a low cost country will give an export subsidy which is fully countervailed by the high cost country's import tariff. In the simultaneous signalling game, each country's expected welfare is higher than under free trade. Chapter 5 considers models of trade bloc formation under integrated markets. With common constant costs, there is no incentive for blocs to form. When costs are decreasing in membership of a bloc, either global free trade is optimal or countries would prefer to belong to the smaller of two blocs