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Abstract:
This paper examines the interaction between preferential trade agreements (PTAs) and multilateral tariff reduction in a model of imperfect competition. A growing literature finds that the formation of PTAs alters the incentives for and the sustainability of multilateral tariff reduction. We show that the causation is not one-sided -- multilateral tariff reduction also affects the formation of PTAs. Specifically, tariff reduction enhances the incentives to form a PTA and increases the likelihood that it is self-enforcing. Thus, each round of multilateral tariff reduction should lead to a new wave of PTAs. This may help to explain the current trend towards regionalism.
Full paper, latest version (248 KB PDF)
Original version (220 KB PDF)
Keywords
Trade, regionalism, imperfect competition
PDF files: Adobe Acrobat Reader ZIP files: PKWARE
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Last update: August 27, 2001
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