Working Paper: CEPR ID: DP5960
Authors: George Deltas; Klaus Desmet; Giovanni Facchini
Abstract: This paper analyzes how the sequential formation of free trade areas affects the volume of trade between member countries. In a three--country, three--good model, if two countries have a free trade area, and both sign a similar agreement with the third, trade between the two decreases, and welfare rises in both. However, if only one of them signs an FTA with the third, a hub-and-spoke pattern arises. If the two spokes have a comparative advantage in different goods, trade between the two countries in the initial FTA increases, with welfare rising in the hub and falling in the spoke. We provide evidence consistent with the theoretical model when studying the experience of Israel.
Keywords: free trade areas; hub-and-spoke; Israel; trade volumes
JEL Codes: F11; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Formation of FTAs (F15) | Trade between the two countries decreases (F10) |
| Formation of FTAs (F15) | Welfare rises in both countries (I39) |
| Asymmetric FTA formation (F15) | Increased trade between the two countries in the initial FTA (F10) |
| Asymmetric FTA formation (F15) | Welfare rises in the hub (I39) |
| Asymmetric FTA formation (F15) | Welfare falls in the spoke (I38) |
| FTA with the EU (F15) | Trade increased by nearly 30% (F10) |
| Multilateral free trade (F13) | Trade between Israel and the EU decreases (F10) |