Bilateral versus Multilateral Free Trade Agreements A Welfare Analysis

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1、ReviewofInternationalEconomics,22(3),513535,2014DOI:10.1111/roie.12131BilateralversusMultilateralFreeTradeAgreements:AWelfareAnalysisDemetYilmazkudayandHakanYilmazkuday*AbstractWhyisaproliferationofbilateralfreetradeagreements(FTAs)betweencertaintypeso

2、fcountriesobservedinsteadofprogressinattainingglobalfreetradethroughamultilateralFTA?ThispaperanswersthisquestionbyexploringtheenforceabilityofdifferenttypesofFTAsthroughcomparingminimumdis-countfactorsthatarenecessarytosustaintheminaninÞnitelyrepeated

3、gameframework.Theauthorssearchforthegloballywelfaremaximizingtradeagreementsthataresustainableunderdifferentconditions.Theresultsdepictthattransportationcosts,differencesincountrysizesandcomparativeadvantagesareallobstaclesforhavingamultilateralFTA.Acc

4、ordingly,internationaldevelopmentpoliciesconductedfortheremovalofsuchobstaclesshouldbethemaingoaltowardachievingamultilateralFTA,whichisshowntobetheÞrst-bestsolutiontothemaximizationproblemofglobalwelfare.1.IntroductionThelackofaforcingauthorityintrade

5、relationsofworldcountriesmakesitdifÞculttoachieveamultilateralfreetradeagreement(FTA)thatincreasesworldwelfare.Thiscreatesastructuralproblemofrulesintradeagreementsthatwillself-enforcethetradingcountriestoachievemoreliberaltrade.Inthispaper,westudythes

6、eself-enforcingruleswithasymmetriccountriesfromtheperspectiveofbilateralandmulti-lateralFTAs.Inparticular,weattempttoÞndananswertothequestionofÒWhyareFTAsbilateral/regional/preferentialratherthanmultilateral?ÓBeforewecananswerthisquestion,sincemanytrad

7、emodelsÞndamultilateralFTAtobetheÞrst-bestsolution,weneedtoknowwhybilateralFTAsexistintheÞrstplace.Tobetterunder-standthecharacteristicsofbilateralFTAs,considerBaierandBergstrand(2004)whoÞndempiricallythatthepotentialwelfaregainsandlikelihoodofabilater

8、alFTAareeconomicallyandsigniÞcantlyhigher:(i)thecloserindistancearetwotradingpart-ners;(ii)themoreremoteanaturalpairisfromtherestoftheworld(ROW);(iii)thelargerandmoresimilareconomically(i.e.realgrossdomesticproducts(GDPs))aretwotradingp