DOI QR코드

DOI QR Code

Trade Coordination in Free Trade Agreements and Customs Unions

  • Nahm, Sihoon (Department of International Business and Trade, Myongji University)
  • Received : 2019.04.08
  • Accepted : 2019.05.20
  • Published : 2019.05.31

Abstract

Purpose - This paper explains why free trade agreements (FTAs) are more popular than customs unions (CUs) in respect of tariff coordination. Design/methodology - This paper employs an equilibrium theory of trade agreements with tariff coordination. I set up three-country partial equilibrium model with competing exporters. Domestic and exporting firms decide their optimal production under given tariffs and each country levies its tariff under the trade agreements. I found stability of implicit tariff coordination and preference of each country between an FTA and a CU. Findings - I demonstrate that two FTA members can keep their external tariffs higher than separately decided external tariffs by keeping the status-quo. This implicit tariff coordination can benefit each member through trade diversion. In a CU, each member country must have a common optimal external tariff and it must incur costs because each country may seek different external tariffs for their own national welfare. The benefit of implicit coordination in an FTA and the cost of explicit coordination in a CU account for the popularity of the FTA. Originality/value - This paper uses the idea of implicit tariff coordination in trade agreements. In a CU, tariff coordination is explicit and mandatory. All member countries must have a single common external tariff for each good. On the other hand, in an FTA, each country establishes its external tariff with the goal of maximizing its own welfare. However, each country can also coordinate "implicitly" by keeping the status-quo after establishing an FTA.

Keywords

References

  1. Bagwell, K. and R. W. Staiger (1999), "Regionalism and Multilateral Tariff Cooperation". In J. Piggott and A. Woodland (Eds.), International Trade Policy and the Pacific Rim, London: Macmillan, 157-190.
  2. Baldwin, R. E. and A. J. Venables (1995), "Regional Economic Integration". In G. M. Grossman and K. Rogoff (Eds.), Handbook of International Economics (Vol. 3), Amsterdam: Elsevier, 1597-1644.
  3. Bond, E. W., R. G. Riezman and C. Syropoulos (2004), "A Strategic and Welfare Theoretic Analysis of Free Trade Areas", Journal of International Economics, 64(1), 1-27. https://doi.org/10.1016/S0022-1996(03)00078-3
  4. Choi, Jay-Pil (1995), "Optimal Tariffs and the Choice of Technology Discriminatory Tariffs vs. the 'Most Favored Nation' Clause", Journal of International Economics, 38(1-2), 143-160. https://doi.org/10.1016/0022-1996(94)01335-P
  5. Estevadeordal, A., C. Freund and E. Ornelas (2008), "Does Regionalism Affect Trade Liberalization toward Non-members?", The Quarterly Journal of Economics, 123(4), 1531-1575. https://doi.org/10.1162/qjec.2008.123.4.1531
  6. Freund, C. L. and E. Ornelas (2010), "Regional Trade Agreements", Annual Review of Economics, 2, 139-166. https://doi.org/10.1146/annurev.economics.102308.124455
  7. Gatsios, K. (1990), "Preferential Tariffs and the 'Most Favoured Nation' Principle: A Note", Journal of International Economics, 28, 365-373. https://doi.org/10.1016/0022-1996(90)90009-B
  8. Limao, N. (2006), "Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the United States", American Economic Review, 96(3), 896-914. https://doi.org/10.1257/aer.96.3.896
  9. Maggi, G. (2014), "International Trade Agreements". In E. Helpman, K. Rogoff and G. Gopinath (Eds.), Handbook of International Economics (Vol. 4), Amsterdam: Elsevier, 317-390.
  10. Ornelas, E. (2007), "Exchanging Market Access at the Outsiders' Expense: The Case of Customs Unions", The Canadian Journal of Economics, 40(1), 207-224. https://doi.org/10.1111/j.1365-2966.2007.00405.x
  11. Richardson, M. (1993), "Endogenous Protection and Trade Diversion", Journal of International Economics, 34(3), 309-324. https://doi.org/10.1016/0022-1996(93)90052-Y
  12. Saggi, K. (2006), "Preferential Trade Agreements and Multilateral Tariff Cooperation", International Economic Review, 47(1), 29-57. https://doi.org/10.1111/j.1468-2354.2006.00371.x
  13. Saggi, K., A. Woodland and H. M. Yildiz (2013), "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions", American Economic Journal: Microeconomics, 5(1), 63-99. https://doi.org/10.1257/mic.5.1.63
  14. Saggi, K. and H. M. Yildiz (2010), "Bilateralism, Multilateralism, and the Quest for Global Free Trade", Journal of International Economics, 81(1), 26-37. https://doi.org/10.1016/j.jinteco.2010.01.004