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Free Trade Networks with Transfers

By Taiji Furusawa and Hideo Konishi

Abstract

The paper investigates the network of bilateral free trade agreements (FTA) in the context of a network formation game with transfers. Furusawa and Konishi (2002) show that without international transfers, countries with different industrialization levels may not sign an FTA, so that the global free trade network, in which every pair of countries sign an FTA, is not pairwise stable in general. We show in this paper that even if the world consists of fairly asymmetric countries, the global free trade network is pairwise stable when transfers between FTA signatories are allowed. Moreover, it is the unique pairwise stable network unless industrial commodities are highly substitutable from one another.Free Trade Agreements, Network Formation Game, Transfers

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