Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75653
Authors: 
Kose, M. Ayhan
Riezman, Raymond
Year of Publication: 
2000
Series/Report no.: 
CESifo Working Paper 253
Abstract: 
This paper examines the welfare implications of preferential trade agreements (PTAs) from the perspective of small countries in the context of a multi-country, general equilibrium model. We calibrate our model to represent one relatively small country and two symmetric big countries. We consider two cases. In one case, the small country is an 'innocent bystander', that is, it is left out of a PTA between the two large countries. In the second case, the small country signs a PTA with one of the large countries. We simulate the model and calculate consumption allocations, prices, t rade volume, and tariffs in these two cases considering three different equilibria: Free Trade (FT), Free Trade Area (FTA), and Customs Union (CU). We find that free trade is the best outcome for the small country. If the large country PTA takes the for m of a CU then the cost of being an 'innocent bystander' is very large. If it is a FTA then the cost of being an 'innocent bystander' is relatively modest. In fact, the small country prefers to be an 'innocent bystander' to being a member of a FTA with one of the large countries.
Subjects: 
Preferential trade agreements
general equilibrium
tariffs
welfare
small countries
Document Type: 
Working Paper

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