Bilateral free trade agreement in vertical trade structure

Hiroshi Kurata, Yasushi Kawabata, Akihiko Yanase

    Research output: Chapter in Book/Report/Conference proceedingChapter

    Abstract

    We investigate the welfare effect of the bilateral free trade agreement (FTA) in a vertical trade structure. We consider a three-country model with one country exporting intermediate goods (upstream country) and two countries exporting final goods (downstream countries). We focus on the situation where both the upstream and downstream countries impose positive import tariffs before forming the FTA. We then consider an FTA between the upstream country and one of the downstream countries. The other downstream country is regarded as a nonmember country. After forming the FTA, all of the tariffs between the member countries are eliminated, whereas the tariffs between the FTA member and nonmember are maintained. We have two scenarios in relation to the FTA; the first one is the case where external tariff reform by the FTA member country is not allowed, and the second one is the case where external tariff reform is allowed. Then, in the first scenario, the FTA unambiguously decreases the nonmember's welfare, while it may or may not increase the FTA members' welfare. The latter result depends on the number of firms producing the intermediate and the final goods and on the levels of the initial tariffs. Irrespective of an increase of the FTA members' welfare, Pareto-improving FTA is not possible. In contrast, in the second scenario, if an external tariff reform, i.e., a reduction of tariff by the FTA member, is available, there exist some possibilities that the FTA increases both of the FTA members' welfare without changing the nonmember's welfare. Therefore, Pareto-improving welfare is possible.

    Original languageEnglish
    Title of host publicationTrade Liberalization and Protectionism
    PublisherNova Science Publishers, Inc.
    Pages207-231
    Number of pages25
    ISBN (Print)9781608768370
    Publication statusPublished - 2010 Dec 1

    Keywords

    • Cournot competition
    • External tariff reform
    • Free trade agreements
    • Vertical trade

    ASJC Scopus subject areas

    • Social Sciences(all)

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