A Numerical General Equilibrium Model with Endogenous Formation of Trading Blocs

Fisher, Timothy C. G.; Waschik, Robert G.

doi:2006.21.4.881

Journal of Economic Integration 2006 December;21(4) :881-914.
DOI: https://doi.org/10.11130/jei.2006.21.4.881

A Numerical General Equilibrium Model with Endogenous Formation of Trading Blocs

Timothy C. G. Fisher, Robert G. Waschik

University of Sydney
La Trobe University

ABSTRACT

We are interested in whether Preferential Trade Agreements facilitate attainment of Global Free Trade. Using a numerical general equilibrium model based on global trade data aggregated to 5 regions and 12 goods, we calculate the optimal tariffs in a Nash tariff-setting game when regions are free to form trading blocs. Using Riezman's (1999) notion of blocking coalitions, we determine endogenously whichtradingbloc structures emerge when regions can form Free Trade Areas or Customs Unions. We nd that Global Free Trade may not be an equilibrium outcome unless constraints are placed on the way Customs Unions set their Common External Tariffs.

JEL classification: F15, F13, C68

Keywords: Endogenous coalition formation | Preferential trade agreements

REFERENCE

1.	Adams, R., P. Dee, J. Gali, and G. McGuire (2003) "Trade and Investment Effects of Preferential Trading Arrangements - Old and New Evidence" Productivity Commission Staff Working Paper, Canberra, May.

2.	Andriamananjara, Soamiely (2002), "On the Size and Number of Regional Integration Arrangements: A Political Economy Model" Journal of International Trade and Economic Development 11:3 279-95.