Dynamic Free Trade Networks: Some Numerical Results

To investigate dynamic paths of network formation of free trade agreements (FTAs), we conduct simulations of Goyal and Joshi’s (2006) model of FTA network formation game with many countries. We compare the results between two protocols regarding the choice of the pair that decides if they form (or sever) an FTA link in each round in the network evolution. The first protocol is the random protocol in which a pair of countries is randomly chosen in each period. The other protocol is the maximum protocol in which the country that has the largest incentive can propose to form or sever an FTA link. We find that with the random protocol, FTA evolution processes reach the complete FTA network in some cases but its likelihood becomes smaller if the number of countries grows. With the maximum protocol, the network evolution always ends with a unique final FTA network for each case of n ∈ {3, 4, · · · , 100} countries. The final FTA network may or may not be the complete network. Preliminary and incomplete We are grateful to the participants of the Hitotsubashi COE Conference on International Trade and FDI 2010 for helpful comments. We also benefit from discussions with Jin Zhang at the early stage of the research. Graduate School of Commerce, Hitotsubashi University. Weatherhead Center for International Affairs, Harvard University. Email: [email protected]