Date of This Version
July 2007
Abstract
This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries, a familiar problem of coordination failure arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.
Recommended Citation
Zissimos, Ben, "Why are Trade Agreements Regional? " (July 05, 2007). Fondazione Eni Enrico Mattei Working Papers. Paper 127.
https://services.bepress.com/feem/paper127