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Free‐Trade Areas and Welfare: An Equilibrium Analysis
Author(s) -
Yi SangSeung
Publication year - 2000
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00225
Subject(s) - economics , free trade , international free trade agreement , welfare , international economics , pareto principle , trade barrier , free trade agreement , international trade , general equilibrium theory , microeconomics , market economy , operations management
This paper examines the welfare effects of the formation of a free‐trade area. When a country is constrained to charge lower tariffs on imports from some countries, it is in its interest to reduce external tariffs as well. In alinear‐quadratic model of intraindustry trade, the reduction in external tariffs induced by free‐trade agreements is sufficiently large to make nonmember countries better off. Since only privately beneficial free‐trade agreements are signed voluntarily, the formation of a free‐trade area is a Pareto improvement. Owing to free‐riding problems, however, the global free‐trade area may not be a stable outcome.