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Can Bilateral Trade Agreements Help Induce Free Trade?

Author

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  • Raymond Riezman
Abstract
There has been growing debate about whether bilateral trade agreements are damaging multilateral efforts to eliminate barriers to international trade. This paper develops a model in which trading blocs always charge optimal tariffs and make trade agreements based on strategic considerations. We ask a very simple question. Does the fact that trading blocs can form bilateral trade agreements make Free trade less likely to occur? The answer is that it depends on the size distribution of the trading blocs. If there is one large trading bloc along with some smaller ones then bilateral trade agreements allow the smaller trading blocs to coalesce and block the monopoly power of large trading blocs. In this case, bilateral trade agreements facilitate the attainment of free trade. Not allowing customs unions leads to more not less protection. If trading blocs are of roughly equivalent size then bilateral trade agreements allow groups of trading blocs to more effectively monopolize world trade in which case they may make free trade less likely. These results suggest that a policy that inhibits the formation of trading blocs may be harmful. We also compute the welfare effects of trade agreements to get some idea of how empirically important these issues are.

Suggested Citation

  • Raymond Riezman, 1999. "Can Bilateral Trade Agreements Help Induce Free Trade?," CSGR Working papers series 44/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
    • Handle: RePEc:wck:wckewp:44/99
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    References listed on IDEAS

    as
    1. Konstantine Gatsios & Larry Karp, 1991. "Delegation Games in Customs Unions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 391-397.
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    8. Haverman, J.D., 1993. "Some Welfare Effects of Dynamic Customs Union Formation," Papers 93-109, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
    9. John Kennan & Raymond Riezman, 2013. "Optimal Tariff Equilibria with Customs Unions," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 5, pages 53-66, World Scientific Publishing Co. Pte. Ltd..
    10. Jon D. Haveman, 1996. "Some Welfare Effects of Sequential Customs Union Formation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 941-958, November.
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    More about this item

    Keywords

    Free Trade Agreements; Tariffs; Welfare; General Equilibrium.;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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