Abstract
This chapter investigates whether the formation of bilateral overlapping free trade agreements (FTAs) between dissimilar countries becomes a building block or a stumbling block for multilateral free trade (MFT). Our main conclusions are as follows. Suppose that a bilateral FTA between symmetric countries is already formed. (i) A bilateral FTA becomes a stumbling block for MFT through overlapping FTAs, while it acts as a building block for MFT through expansion of FTAs when market sizes of member and nonmember countries are quite similar. (ii) When the market size of a nonmember country is smaller than that of member countries, then overlapping FTAs lead to MFT, while FTA expansion may or may not. (iii) If the nonmember country of the original FTA is large, then expansion of the FTA may not achieve MFT, while overlapping FTAs cannot. (iv) When the market size of the nonmember country is quite large compared with member countries, MFT never arises through overlapping FTAs, FTA expansion, or negotiation of a multilateral trade agreement.
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Notes
- 1.
These numbers include notifications made under GATT Article XXIV, GATS Article V, and the Enabling Clause. Further details are available at the WTO web page at http://www.wto.org/english/tratope/regione/regione.htm.
- 2.
We should note that in Fiorentino et al. (2009), bilateral agreements may include more than two countries when one of them is an RTA.
- 3.
Baldwin (2006) pointed out that the multilateralization of existing and emerging regionalism is required in order to achieve global free trade under circumstances in which regionalism is permanent and unlikely to change; further, he considered the role of the WTO in the multilateralization of regionalism.
- 4.
- 5.
- 6.
We should note that overlapping agreements can be formed only when the existing RTA is an FTA. If an existing PTA is a CU, then each member country cannot negotiate individually with nonmember countries.
- 7.
For example, Chile is attaining the position of a hub country, creating or negotiating FTAs with New Zealand, Brunei, Singapore, China, India, Japan, and other countries. Singapore and Thailand have also become active in the formation of bilateral FTAs in recent years.
- 8.
Mukunoki and Tachi (2006) assumed that the tariff level is exogenous and the external tariff remains at the same level after any FTA is formed.
- 9.
Saggi and Yildiz (2010) considered similar issues in a different model (i.e., competing exporters’ model) and showed that when countries have asymmetric endowments, global free trade can be a stable equilibrium only when countries can form bilateral agreements.
- 10.
- 11.
Such a myopic assumption of players is also assumed in the literature on the process of network structure. See, for example, Watts (2001).
- 12.
- 13.
The rent-shifting effect becomes positive if \(d^{i} > \frac{384} {351}d^{j}\) under i − j FTA.
- 14.
The same holds true for country 2 in the case where country 2 becomes a hub country because of symmetry between countries 1 and 2 (Assumption 1.1).
- 15.
Ornelas (2005b) showed similar results.
- 16.
We should note that our assumption of market asymmetry is different from that in Nomura et al. (2013), which cannot consider the situation where all countries are symmetric.
- 17.
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Acknowledgements
This work was supported by Grants-in-Aid for Scientific Research (no. 23530303, 26380340, and 26380318). All remaining errors are ours.
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Nomura, R., Ohkawa, T., Okamura, M., Tawada, M. (2016). Expansion of Free Trade Agreements, Overlapping Free Trade Agreements,and Market Size. In: Ohkawa, T., Tawada, M., Okamura, M., Nomura, R. (eds) Regional Free Trade Areas and Strategic Trade Policies. New Frontiers in Regional Science: Asian Perspectives, vol 10. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55621-3_1
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