Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201938 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7712
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We show that multilateral tariff binding liberalization substantially impacts the nature and extent of Preferential Trade Agreement (PTA) formation. First, it shapes the nature of forces constraining expansion of Free Trade Agreements (FTAs). The constraining force is a free riding incentive of FTA non-members under relatively high bindings but an exclusion incentive of FTA members under relatively low bindings. Second, multilateral tariff binding liberalization shapes the role played by PTAs in the attainment of global free trade. Initially, tariff binding liberalization leads to Custom Union (CU) formation in equilibrium but in a way that undermines the pursuit of global free trade. However, further tariff binding liberalization leads to FTA formation in equilibrium and in a way that facilitates the attainment of global free trade. Our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of FTAs versus CUs.
Subjects: 
tariff bindings
preferential trade agreement
free trade agreement
customs union
global free trade
dynamic
JEL: 
C72
F12
F13
Document Type: 
Working Paper
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