Endogenous Preferential Trade Agreements

Endogenous Preferential Trade Agreements

This paper shows that preferential trade agreements can emerge in an endogenous way. We use a simple international trade model where governments fix their tariffs in order to maximize social welfare. We find that when countries behave in a non co-operative way this performance leads to tariff discrimination. This result holds whether firms play a Cournot strategy or whether they follow a Stackelberg`s leader-follower strategy. This paper also analyzes whether multilateralism and regionalism are complementary or substitutive processes. It is concluded that, in spite of the fact that absolute protection is reduced as a result of the economic integration process, relative protection against the rest of the world increases and, therefore, the two processes should not be considered as complementary. (JEL Classifications: F15; F14; F13.)