International trade agreements.

Abstract

In recent years, the use of the mode of regional trade liberalisation has proliferated, while the multilateral talks through the WTO have proceeded slowly, resulting in a debate on the role of bilateral and multilateral trade liberalisation. This thesis aims to provide new insights to this debate by studying the welfare effects of different types of trade agreements and the equilibrium outcome(s) of trade negotiation. We apply the three-country and three-good “competing-exporters model" developed by Bagwell and Staiger (1999) as our basic trade framework. By comparing the equilibrium welfare of each country under different structures of trading blocs, we clarify the welfare impacts of each trade agreement. Then we model the process of trade negotiation as a trade negotiation game, in which each country endogenously decides whether to negotiate through multilateral or bilateral trade liberalisation. By solving the equilibrium of the game, the stable structure of trading blocs and the path(s) to reach it can be found. We start with a framework in which all countries are welfare maximising. We find that at the early stage of trade negotiation, a free trade agreement (FTA) is Pareto welfare improving, despite the fact that member countries benefit more than any non-member. Although being the hub is the best position, a spoke is in a worse position than being outside a single FTA. Thus, a “hub-and-spoke" structure cannot be achieved and the unique equilibrium outcome of trade negotiation is given by multilateral free trade (MFT) through a multilateral trade agreement (MTA). The welfare-maximising analysis is followed by the examination of cases in which each government is politically motivated. The political structure we use is similar to Ornelas (2005), which follows the basic framework developed by Grossman and Helpman (1995), emphasising the interaction between lobby groups representing the special interest of one industry and the government in their home country. We first consider a circumstance where the political pressures are only from the import- competing sector. It is then generalised to a case in which all sectors are allowed to lobby the local government. Furthermore, the analysis is extended into an asymmetric world that includes two big countries and one small country. Our results show that political economy forces usually reduce the likelihood of forming trade agreements and that when the political concerns are sufficiently large, all trade agreements can be prevented by political pressures. Also, our findings suggest that the option of bilateral FTAs does not cause an initially infeasible MFT to become feasible, while a previously feasible MFT is likely to be blocked by the option of FTAs. Thus, our thesis provides some evidence to support the argument that the formation of FTAs can be a “stumbling block" for global trade liberalisation.