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Abstract:
We compare free trade reached through expanding regional trading blocks to free trade
accomplished by multilateral negotiation. With sunk costs, the outcomes are different. Trade in an
imperfectly competitive good flows disproportionately more between the original members of a regional
agreement even after free trade is reached. They secure a higher welfare level from regionalism than from
free trade achieved multilaterally; non-members, however, reach a lower welfare level. A surprising result
is that world welfare during free trade is greater when it is achieved by the regional path. We conclude with
some empirical evidence from the European Union that is consistent with the model.
Full paper (288 KB PDF)
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