Free Trade Agreement and Vertical Trade with a Manufacturing Base

Akihiko Yanase, Hiroshi Kurata, Yasushi Kawabata

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    We examine the effects of free trade agreement (FTA) on tariffs and welfare in a three-country model with vertical trade, where an FTA is formed between a country exporting a final good whose production involves using an intermediate good, and a country exporting the intermediate good in exchange for the final good. We demonstrate that the FTA reduces its member country's external tariff, whereas it raises the non-member country's tariff. The non-member country unambiguously becomes better off. In contrast, the FTA may or may not make its member countries better off. This implies that the formation of an FTA may not always be Pareto-improving.

    Original languageEnglish
    Pages (from-to)1070-1081
    Number of pages12
    JournalReview of International Economics
    Volume20
    Issue number5
    DOIs
    Publication statusPublished - 2012 Nov 1

    ASJC Scopus subject areas

    • Geography, Planning and Development
    • Development

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