Kose, M. Ayhan and Riezman, Raymond Glenn (2000) Small countries and preferential trade agreements 'How severe is the innocent bystander problem?'. Working Paper. University of Warwick. Centre for the Study of Globalisation and Regionalisation, Coventry.

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Abstract

This paper examines the welfare implications of preferential trade agreements (PTAs) from the perspective of small countries in the context of a multi-country, general equilibrium model. We calibrate our model to represent one relatively small country and two symmetric big countries. We consider two cases. In one case, the small country is an "innocent bystander," that is, it is left out of a PTA between the two large countries. In the second case, the small country signs a PTA with one of the large countries. We simulate the model and calculate consumption allocations, prices, trade volume, and tariffs in these two cases considering three different equilibria: Free Trade (FT), Free Trade Area (FTA), and Customs Union (CU). We find that free trade is the best outcome for the small country. If the large country PTA takes the form of a CU then the cost of being an "innocent bystander" is very large. If it is a FTA then the cost of being an "innocent bystander" is relatively modest. In fact, the small country prefers to be an "innocent bystander" to being a member of a FTA with one of the large countries.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HF Commerce
Divisions:	Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation
Library of Congress Subject Headings (LCSH):	Tariff preferences, International trade, Free trade, Customs unions, International economic integration, Welfare economics, Equilibrium (Economics)
Series Name:	Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation)
Publisher:	University of Warwick. Centre for the Study of Globalisation and Regionalisation
Place of Publication:	Coventry
Date:	January 2000
Number:	No.48/
Number of Pages:	41
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/2077

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