Feasibility of FTA/EPA and Timing of Trade Policy

Abstract

This paper examines the feasibility of FTA/EPA in a three-country international duopoly model where one importing country and two identical exporting countries exist, and where each government may implement an import tariff and an export subsidy as trade policies. In this paper, FTA is defined as the elimination of export subsidy and import tariff among member countries, and EPA is defined as the elimination of such trade policies among member countries and the income transfer as an economic cooperation among member countries. The main conclusions are as follows. [i] The FTA between an importing country and an exporting country is not formed irrespective of the timing of trade policy, whereas the EPA is formed under specific conditions when the timing of trade policy is simultaneous. [ii] If the EPA between the importing country and the exporting country is formed, the EPA benefits a non-member exporting country and increases world welfare. [iii] The welfare of the importing country (of the exporting countries) is greater (less) than that in free trade even though world welfare is at the same level as in free trade.JEL Classification: F12, F13, L13