Endogenous Preferential Trade Agreements

Abstract

This paper shows that preferential trade agreements can emerge in an endogenous way. We use a simple international trade model where govern ments fix their tariffs in order to maximize social welfare. We find that when countries behave in a non co-operative way this performance leads to tariff dis crimination. This result holds whether firms play a Cournot strategy or whether they follow a Stackelberg's leader-follower strategy. This paper also analyzes whether multilateralism and regionalism are complementary or sub stitutive processes. It is concluded that, in spite of the fact that absolute protec tion is reduced as a result of the economic integration process, relative protec tion against the rest of the world increases and, therefore, the two processes