Working Paper: NBER ID: w4753
Authors: Edward E. Learner
Abstract: A free trade agreement supports global free trade since trade barriers tend to divert trade in favor of members, but not reduce imports. The term: 'mutual assured deterrence' is used to refer to a regional free trade association that has the feature that no member can gain individually from the imposition of a barrier against a non- member. Mutual assured deterrence is shown to be possible for a surprisingly rich set of partners. A customs union is compatible with global free trade if the vast majority of trade takes place naturally within the confines of the association. A customs union that is likely to have this property would combine countries to form a nearly exact economic replica of the globe. The economic combination of Mexico and the United States doesn't form a replica of the global economy because, compared with Asia, North America has relatively high capital per worker even after adding the Mexican workforce. However, NAFTA does seem to have the property of mutual assured deterrence, and may for that reason amount to a commitment to global free trade as well as regional free trade.
Keywords: Free Trade; Regional Trade Agreements; Global Trade; Mutual Assured Deterrence
JEL Codes: F02; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| free trade agreement (FTA) (F15) | likelihood of barriers being erected against nonmembers (F55) |
| free trade agreement (FTA) between the United States and Mexico (F15) | incentives for the U.S. to impose barriers against imports from Asia (F14) |
| barriers against nonmembers (F55) | divert trade to member countries (F13) |
| majority of trade occurring within the FTA (F15) | need for external barriers (F55) |