The number of free trade agreements (FTAs) has increased in the past few decades, and the cross-country variation of the most-favored-nation (MFN) tariffs has decreased. Motivated by these two facts, we study whether the reduced variance in cross-country MFN tariffs can help explain the expansion of FTAs. Using an oligopolistic trade model with the equilibrium concept of pairwise stable networks, we reveal the existence of a set of pairwise stable network equilibria, where the number of FTAs rises as tariffs become increasingly symmetrical. This finding contributes to theoretical FTA literature by showing that an incomplete FTA network can be supported as a pairwise stable network equilibrium.
Bibliographical noteFunding Information:
We appreciate the comments of two anonymous referees. This project is financially supported by RGC Competitive Earmarked Research Grant 2012–2014 (No. HKU751812B) of the HKSAR Government.
© 2022, The Author(s) under exclusive licence to Kiel Institute for the World Economy.
- Free trade agreements
- Pairwise stable networks