International Finance Discussion Papers (IFDP)
September 2000
Spaghetti Regionalism
Caroline Freund
Abstract:
This paper examines the welfare implications of multiple free trade agreements in a model of imperfect competition. We show that free trade is the unique Nash equilibrium under the simple rule that any two countries can form a bilateral free trade agreement. Specifically, a country is always better off forming a bilateral trade agreement with every other country, irrespective of previous agreements. This suggests that each new preferential free trade agreement may be a step towards multilateral free trade.
Keywords: Trade, imperfect competition, bilateral agreement
PDF: Full Paper
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