Regionalism and Multilateral Trade Liberalization with Asymmetric Countries

Abstract

The paper examines the impact of regionalism on the process of multilateral trade liberalization when countries are asymmetric. The author uses a three-country, three-good, competing exporters model, with countries being symmetric in everything but their discount factors. The equilibrium regional agreement is found to be a customs union between a patient and an impatient country and that the impact of regionalism depends on the discount factors. The impact of regionalism on multilateral trade liberalization depends critically on which countries engage in regionalism. Copyright Blackwell Publishing Ltd 2004.

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

“…First consider the perspective of the larger countries. We know from (14) and (17) that starting from global free trade, under symmetry, two countries have no incentive to jointly deviate from hF i to h i. Lemma 2 implies that @w l (F ) @ = @ w l 0 (F ) @ > 0 and thus it follows that the larger countries have no incentive to deviate from hF i to h i:…”

“…8 Unlike others, Bagwell and Staiger (1997a) also consider the period of transition during which a CU arises and …nd that while the early stages of CU formation facilitates multilateral liberalization, the harmony between CUs and multilateral trade liberalization is only temporary. Hadjiyiannis (2004) extends the Bagwell Staiger (1998) competing exporters model of trade to allow for asymmetric discount factors across countries. He examines a scenario where two countries are patient relative to the third and …nds that the impact of a PTA depends on which countries form the PTA.…”

“…7 We next brie ‡y discuss three strands of existing literature that overlap to some degree with our paper. The …rst related stream of literature comprises of models of repeated interaction that examine how the exogenous formation of a PTA a¤ects incentives for selfenforcing multilateral tari¤ cooperation on the part of members and non-members -see Bagwell and Staiger (1997a, 1997b, Bond and Syropoulos (1996), Hadjiyiannis (2004), and Saggi (2006). 8 A second closely related line of research examines the type of trading blocs that emerge as stable equilibria when the number and the sizes of trading blocs are endogenously determined -see Yi (1996), Goyal and Joshi (2006), and Furusawa and Konishi (2007).…”

“…its tari¤ on the non-member relative to the status quo (i.e., the model exhibits tari¤ complementarity): t u < t . 17 Furthermore, since tari¤s are independent across countries, the non-member continues to impose its optimal MFN tari¤ on the member countries of the CU.…”

“…Furthermore, it is immediate from (14) and (17) that joint deviation (JF2) will also not occur. In fact, h i is not a stable equilibrium because inequality (14) implies that the joint deviation of countries i and j from h i to hiji is self-enforcing: any further deviation from hiji on the part of either member reverts them back to h i under which both are worse-o¤.…”