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American Economic Journal: Microeconomics: Vol. 5 No. 1 (February 2013)

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On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions

Article Citation

Saggi, Kamal, Alan Woodland, and Halis Murat Yildiz. 2013. "On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions." American Economic Journal: Microeconomics, 5(1): 63-99.

DOI: 10.1257/mic.5.1.63

Abstract

This paper compares equilibrium outcomes of two games of trade liberalization. In the Bilateralism game, countries choose whether to liberalize trade preferentially via a customs union (CU ), multilaterally, or not at all. The Multilateralism game is a restricted version of the Bilateralism game in that countries cannot form CUs and can only undertake non-discriminatory trade liberalization. When countries have symmetric endowments, global free trade is the only stable equilibrium of both games. Allowing for endowment asymmetry, we isolate circumstances where the option to form CUs helps further the cause of multilateral liberalization as well as where it does not. (JEL F12, F13)

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Authors

Saggi, Kamal (Vanderbilt U)
Woodland, Alan (U New South Wales)
Yildiz, Halis Murat (Ryerson U)

JEL Classifications

F12: Models of Trade with Imperfect Competition and Scale Economies
F13: Trade Policy; International Trade Organizations

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