Multilateral Tariff Cooperation during the Formation of Free Trade Areas

Abstract

We consider the impact of the formation of free-trade agreements on multilateral tariff cooperation. We assume that countries are limited to selfenforcing multilateral arrangements that balance the gains from deviating against the costs of an ensuing trade war. We find that the emergence of free-trade areas will be accompanied by a temporary retreat from liberal multilateral trade policies, as the initial balance supporting multilateral cooperation is upset. Eventually, however, as the full impact of the emerging free-trade agreement on multilateral trade patterns is felt, this initial balance tends to reemerge, and liberal multilateral trade policies can be restored.