Preferential Trade Agreements, Technology Adoption and the Speed of Attaining Free Trade
نویسندگان
چکیده
This paper compares sequential trade liberalization through a preferential trade agreement (PTA) and one-shot multilateral trade liberalization with respect to the speed with which countries attain multilateral free trade. We build a three-country oligopoly model, including one developing country whose domestic firm initially uses old technology. Firm-level adoption of new technology and countrylevel conclusions of trade agreements are endogenously determined. When a PTA that includes the developing country is feasible, but a multilateral trade agreement is infeasible due to prior to technology adoption in the developing country, a free trade area (FTA) accelerates technology adoption and the realization of multilateral free trade; however a customs union (CU) delays these processes. The opposite case is obtained if PTAs are infeasible prior to technology adoption, or if they are formed between developing countries. Even if increased realization of free trade via an FTA improves world welfare, a developed country may prefer liberalization via a CU.
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