Liberalizing Trade between Large and Small: The Welfare from Three Different Strategies

Abstract

Much trade liberalization involves large and small countries. This paper presents a formal comparison of the economic welfare effects for the small and large country from unilateral free trade by the small country, from a free trade agreement, and from preferential access to the large country's market. I show that it matters for the welfare effects of these strategies whether the small country has an effect on the domestic price in its partner's domestic market or not. For example, if the small country is so small that it does not, then, paradoxically, a reduction of the small country's tariff reduces the large partner's welfare.