Abstract
This paper deals with problems that countries encounter when they enter into overlapping free trade associations, with special reference to the Americas. We discuss four closely related issues: (1) inefficiencies caused by overlapping free trade areas; that is, by a “hub-and-spoke” system; (2) rules of origin; (3) the comparative merits of free trade associations (FTAs) and customs unions (CUs); and (4) the NAFTA rule of accession. Overlapping free trade areas can cause trade distortions, with negative effects concentrated on the smaller members. These effects cannot be eliminated by bilateral agreements among the “spokes” because of rules of origin, which are a significant complication in any FTA. We conclude by recommending a “hybrid” FTA, with no rules of origin for products where the members agree upon common external tariffs or where all members have low tariffs. This would combine some of the advantages of FTAs and customs unions.
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