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Gradualism in Free Trade Agreements: A Theoretical Justification

Author

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  • Richard Chisik

    (Department of Economics, Ryerson University, Toronto, Canada)

Abstract
A notable feature of many recent trade agreements is the gradual, rather than immediate, reduction of trade barriers. In this paper we model trade liberalization as a cooperative relationship that evolves gradually in a non-cooperative environment. We show that specialization, capacity irreversibility and the development of trade-partner specific capital increase the benefit of continuing the liberalizing relationship and decrease, over time, the lowest obtainable self-enforcing tariff. By increasing the penalty of future defection, sunk costs ensure that the self-enforcing trading relationship starts slowly, but once in progress the level of cooperation continues to improve.

Suggested Citation

  • Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp018
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    More about this item

    Keywords

    Trade Negotiations; Gradualism; Irreversibilities; Economic Integration; Dynamic Games.;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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