On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

Abstract

This paper compares equilibrium outcomes of two games of trade liberalization. In the Bilateralism game, countries choose whether to liberalize trade preferentially via a customs union (CU), multilaterally, or not at all. The Multilateralism game is a restricted version of the Bilateralism game in that countries cannot form CUs and can only undertake non-discriminatory trade liberalization. When countries have symmetric endowments, global free trade is the only stable equilibrium of both games. Allowing for endowment asymmetry, we isolate circumstances where the option to form CUs helps further the cause of multilateral liberalization as well as where it does not. (JEL F12, F13)

Preferential versus multilateral trade liberalization and the role of political economy

“…29 Thus, country a is more concerned about producer surplus than countries c and b. Also, let a (r v) i denote the critical threshold for country a's political bias parameter at which government i is indi¤erent between regimes r and v. To avoid redundancy, we skip the discussion of Nash equilibrium and focus directly on CPNE agreements under bilateralism.…”

External trade diversion, exclusion incentives and the nature of preferential trade agreements

“…Unlike the present paper, both Saggi and Yildiz (2010) and Saggi et al (2013) analyze PTA formation in a competing exporters model of trade in which each country imports the same good from two other countries. Both of these papers primarily focus on the issue of whether PTAs are building or stumbling blocs for free trade by comparing outcomes of two games -one where discriminatory PTAs are allowed and another where only nondiscriminatory multilateral agreements are permitted.…”

“…While the present paper follows the analytical approach of Saggi and Yildiz (2010) and Saggi et al (2013), it highlights an important conceptual di¤erence between the two types of PTAs that has not been explored in these papers (or in the rest of the literature on PTAs). More speci…cally, the conceptual point that the relative in ‡exibility of a CU makes it coalitionally more stable than an FTA has never really been explicitly proven in the literature since most existing papers generally focus on only one type of a PTA.…”

“…Our modeling approach follows that of Saggi and Yildiz (2010) and Saggi et al (2013) under which PTAs emerge endogenously as the outcome of a game of trade liberalization between three countries that are free to pick their PTA partners as well as their tari¤ levels. We derive 1 Roughly 90% of the existing PTAs take the form of FTAs, with CUs comprising the rest (Freund and Ornelas, 2010).…”

Is the GATT/WTO's Article XXIV bad?

“…Note that Article XXIV is not the main focus of Bagwell and Staiger's analysis and they do not actually study equilibrium under its conditions. 8 The literature on the dynamics of trade liberalization examines the possibility that trade agreements give way to world free trade at a later stage; see Riezman (1999), Aghion et al (2007), Seidmann (2009) and Saggi et al (2010) for recent contributions. Building on Baldwin (1996), Krishna (1998) shows how political interests can undermine the progression from regionalism.…”