Flexibility in Regional Trading Agreements

Abstract:

This project undertakes an economic analysis of the formation and design of regional trade agreements (RTAs) in a world characterised by irreversible decisions. By allowing the trading environment to change over the life of a RTA and by incorporating irreversibility and the possibility of RTA overlap into the analysis, this project makes it possible, for the first time, to investigate the trade-off prospective members face between flexible and rigid RTA design.This introduction of flexibility into this literature represents a contribution because it will allow a more complete evaluation of the costs and benefits of different types of RTAs than has been possible in the literature to date. In particular, by explicity accounting for both flexibilities and regidities in RTA design, this project will shed further light on a long-standing inconsistency in the RTA literature - the theoretical primacy of Customs Unions (CU) on the one hand, against the observed popularity of Free Trade Areas (FTA) on the other. While joining a restrictive RTA (a CU, for example) may yield members monopoly power benefits, they may be unable to exploit trading opportunities with non-members which arise subsequently. On the other hand, a flexible RTA (a FTA, for example) may encourage some members to join overlapping agreements in the future which dilute the benefits of the original arrangement.In short, this project aims to emphasize the option value of flexible preferential trading arrangements.