preferentialtradeliberalization.docVIP

Preferential Trade Liberalization: The Traditional Theory and New Developments Arvind Panagariya* February 1999 Revised: September 1999 *Department of Economics, University of Maryland, College Park MD 20742. Email: panagari@econ.umd.edu. I am indebted to Jagdish Bhagwati, John McMillan and three anonymous referees for numerous helpful comments. Thanks are also due to Kyle Bagwell, Rupa Duttagupta, Pravin Krishna and Robert Staiger for useful suggestions. Table of Contents 1. Introduction 1 2. The Multilateral Trade Policy Framework 4 3. The Traditional Welfare Analysis 6 3.1 Trade Creation and Trade Diversion 7 3.2 The Revenue-Transfer Effect in a Customs Union 12 3.3 Extension to Free Trade Areas 14 Case 1: The Total Supply by A and B is Less than the Demand in A. 15 Case 2: The Total Supply by A and B Equals the Demand in A. 16 Case 3: The Total Supply by A and B Exceeds the Demand in A. 18 3.4 The Meade-Lipsey General-Equilibrium Model 18 3.5 A More General Analysis of the Small-Union Case 22 3.6 The Large-union Case 25 3.7 A Differentiated Products Model 27 3.8 Transport Costs 28 3.9 Economies of Scale and Imperfect Competition 30 4. Welfare-Increasing CUs and FTAs 33 4.1 Customs Unions 33 4.2 Free Trade Areas 36 4.3 Customs Unions with Non-economic Objectives 37 5. Exogenous Division of the World into Blocs 37 5.1 Symmetric Blocs 38 5.2 Asymmetric Blocs 40 5.3 Natural and Unnatural Blocs 40 6. Endogeneity of Policy 43 6.1 The Decision to Form an FTA 43 A Perfect Competition, Small-Union Model 43 A Cournot Oligopoly Model 48 6.2 The Extra-Union Tariff 49 Lobbying and the External tariff in Small-Union Models 50 Turning Trade Diversion into Tariff Revenue 51 Increased Monopoly Power of Trade Blocs 52 6.3 Evidence 53 7. Regionalism and Multilateralism 54 7.1 Strangers: Bloc Expansion 54 7.2 Impact of Regionalism on Multilateralism: Friends or Foes? 57 Stumbling Blocks: A Median Voter Model 57 Stumbling Blocks: A Cournot Oligopoly Model 61