A Numerical General Equilibrium Model with Endogenous Formation of Trading Blocs

A Numerical General Equilibrium Model with Endogenous Formation of Trading Blocs

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.