Location of Repository

Understanding the welfare implications of preferential trade agreements

By M. Ayhan Kose and Raymond Glenn Riezman

Abstract

This paper examines various implications of Preferential Trade Agreements (PTAs), namely Customs Unions (CUs) and Free Trade Areas (FTAs), in the context of a multi-country general equilibrium model based on comparative advantage considerations. We calibrate the model to represent countries with symmetric endowments, and compare the impact of those agreements with free trade and a non-cooperative Nash equilibria. Utilizing aggregate and disaggregate welfare change measures, we quantify the welfare effects of trade arrangements. In particular, we develop a numerical approximation procedure to decompose the welfare changes into two components associated with the variations in terms of trade and volume of trade. The results of our analysis indicate that FTAs are better than CUs on welfare grounds for the world as a whole since both member and nonmember economies enjoy welfare benefits in an FTA. Further, we show that, for certain endowment distributions, upon formation of an FTA, nonmember economies get larger welfare benefits than member economies do. Nonetheless, member economies have larger welfare gains in CUs than in FTAS. Our welfare decompositions suggest that a significant fraction of the welfare changes in both member and nonmember countries is explained by the volume of trade effect for both types of PTAS. This implies that, having free access to larger markets, along with greater market power are both important aspects of PTAS. Comparison across endowment distributions indicates that as countries become more divergent in their endowments, the volume of trade effect gets more pronounced for CUs as well as for FTAS. The absence of policy coordination between the members of FTAs decreases the market power of the member economies and induces welfare losses that are associated with the terms of trade effect. However, the ten-ns of trade effect results in significant welfare gains for the members of CUs since they jointly determine their tariff rates

Topics: HF, JZ
Publisher: University of Warwick. Centre for the Study of Globalisation and Regionalisation
Year: 1999
OAI identifier: oai:wrap.warwick.ac.uk:2080

Suggested articles

Preview

Citations

  1. (1995). 1993a, Multilateral tariff cooperation during the formation of regional free trade areas, NBER Working paper No: doi
  2. (1993). An alternative welfare decomposition for customs unions, doi
  3. (1996). Are free trade areas better than customs unions?, Working Paper,
  4. (1997). Can bilateral trade agreements help induce free trade?, Working Paper No: 97-01, doi
  5. (1991). Commodity trade and International risk sharing: How much do Financial Markets Matter?, doi
  6. (1996). Compatibility of regional and multilateral trading arrangements: reforming the WTO process,
  7. (1989). Customs union theory: retrospect and prospect,
  8. (1995). Customs unions and comparative advantage, mimeo, doi
  9. (1991). Delegation games in customs unions, doi
  10. (1988). Do big countries win tariff wars?, doi
  11. (1993). Endogenous protection and trade diversion, doi
  12. (1995). Free trade agreements versus customs unions, NBER Working Paper No:5084 Krugman, P., 1991a, Is bilateralism bad?, doi
  13. (1985). Geographically discriminatory trade arrangements, doi
  14. (1993). Measuring the effects of regionalism on trade and welfare, in Regional integration and the global trading system
  15. (1987). Models of Business Cycles, doi
  16. (1994). Multilateral trade negotiations and preferential trading arrangements, doi
  17. (1990). Optimal tariff equilibria with customs unions, doi
  18. (1996). Preferential trading areas and multilateralism: strangers, friends or foes?, in Free Trade Areas or Free Trade? The Economics of Preferential Trading Agreements doi
  19. (1996). Regional trading agreements: natural or super-natural?, doi
  20. (1997). Regionalism and the rest of the world, doi
  21. (1996). Regionalism in a multilateral world, mimeo, doi
  22. (1997). Small countries and regionalism, mimeo,
  23. (1996). Some welfare effects of sequential customs union formation, doi
  24. (1950). The customs union issue, doi
  25. (1993). The new regionalism: a country perspective, doi
  26. (1990). The optimal tariff structure in higher dimensions, doi
  27. (1996). The size of trading blocs: Market power and world welfare effects, doi
  28. (1967). The theory of economic unions: a comparative analysis of customs unions, free trade areas, and tax unions, doi
  29. (1996). The welfare implications of trading blocs among countries with different endowments, Inter-American Development Bank, Working Paper Series No: doi
  30. (1996). Welfare and customs unions, mimeo, doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.