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Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis
Author(s) -
Yilmazkuday Demet,
Yilmazkuday Hakan
Publication year - 2014
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/roie.12131
Subject(s) - economics , welfare , international economics , free trade , comparative advantage , international trade , maximization , sustainable development , international free trade agreement , microeconomics , political science , law , market economy
Why is a proliferation of bilateral free trade agreements ( FTAs ) between certain types of countries observed instead of progress in attaining global free trade through a multilateral FTA ? This paper answers this question by exploring the enforceability of different types of FTAs through comparing minimum discount factors that are necessary to sustain them in an infinitely repeated game framework. The authors search for the globally welfare maximizing trade agreements that are sustainable under different conditions. The results depict that transportation costs, differences in country sizes and comparative advantages are all obstacles for having a multilateral FTA . Accordingly, international development policies conducted for the removal of such obstacles should be the main goal toward achieving a multilateral FTA , which is shown to be the first‐best solution to the maximization problem of global welfare.