Free Trade Areas , Policy Independence , and Industrialization Targets ∗

We investigate a mechanism whereby a group of nations forming a free trade area simultaneously can efficiently satisfy industrialization targets. The mechanism does not rely on cross-country transfers, and it is efficient for each member country individually even if other members of the free trade area do not implement the efficient policy. It allows each member country to gain from participating in the free trade area when the objective is to protect the level of industrialization achieved by the target industry prior to formation of the free trade area. Because industrialization targets are satisfied without the need of tariff harmonization or cross-country transfers, the mechanism is politically palatable. Members of the free trade area enjoy policy independence in achieving their goals under the mechanism, a significant advance over other mechanisms and an advantage of free trade areas over customs unions. JEL classification numbers: D60, F13, F15