Working Paper: CEPR ID: DP9135
Authors: Giovanni Facchini; Peri Silva; Gerald Willmann
Abstract: The number of preferential trade agreements has greatly increased over the past two decades, yet most existing arrangements take the form of free trade areas, and less than ten percent can be considered to be fully fledged customs unions. This paper develops a political economy model of trade policy under imperfect competition to provide a positive explanation for the prevalence of free trade areas. In a three--country setting, a representative from each prospective member is elected to determine the tariffs to be applied on imported goods. Under a customs union, the necessity to coordinate tariffs leads voters to strategically delegate power to more protectionist representatives. We show that strategic delegation may imply that free trade areas increase the prospective member countries' welfare compared to customs unions. Moreover, the model also indicates conditions under which free trade areas are more likely to be politically viable than customs unions.
Keywords: Preferential trade agreements; Strategic delegation
JEL Codes: F10; F11; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| necessity to coordinate tariffs in customs unions (F15) | strategic delegation to a more protectionist representative (D72) |
| strategic delegation to a more protectionist representative (D72) | welfare outcomes for member countries (I30) |
| choice of customs union (F15) | welfare compared to free trade areas (F10) |
| free trade areas (F15) | member countries' welfare relative to the most-favored-nation (MFN) regime (F13) |
| customs unions (F15) | welfare relative to the most-favored-nation (MFN) regime (I38) |
| income inequality (D31) | political viability of customs unions (F15) |
| income inequality (D31) | political viability of free trade areas (F15) |