Hub and spoke trade agreements under oligopoly with asymmetric costs

Abstract

Using an oligopoly model of trade with asymmetric costs, we study the individual and world welfare implications of a hub and spoke trade agreement where the hub country is more e¢ cient than spoke countries. Under a hub and spoke trade regime, the hub country can bene…t at the expense of the spokes relative to free trade. Furthermore, if the hub is su¢ ciently e¢ cient compared to the spokes, such a regime can yield higher global welfare than free trade. Preferential treatment of the e¢ cient hub country in its export markets improves world welfare because it helps allocate a larger share of the world's output to a low cost location.