Template-Type: ReDIF-Paper 1.0
Author-Name: Halis Murat Yildiz
Author-X-Name-First: Halis
Author-X-Name-Last: Yildiz
Author-Email: hyildiz@economics.ryerson.ca 
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada

Author-Name: James Lake
Author-X-Name-First: James
Author-X-Name-Last: Lake
Author-Email: jlake@smu.edu
Author-Workplace-Name: Department of Economics, Southern Methodist University, Dallas, TX

Title: On the different geographic characteristics of Free Trade Agreements and Customs Unions

Abstract: A striking phenomenon emerges from casual observation of the geographical characteristics of Preferential Trade Agreements (PTAs): while Customs Unions (CUs) are
only intra-regional, Free Trade Agreements (FTAs) are both inter and intra?regional.
A second striking phenomenon is that FTAs dramatically outnumber CUs. We present
a farsighted dynamic model that endogenizes the choice of PTA type and rationalizes
the first phenomenon via an FTA flexibility benefit: FTAs are more flexible than CUs
because an FTA member is free to form further PTAs with non-members whereas a CU
member must engage in further PTAs jointly with all existing members. Our model
also suggests that greater distance between countries increases the prevalence of FTAs
relative to CUs. Finally, the model relates geography and market size to the order of
PTA formation

Classification-JEL: F12, F13, C71
Keywords: Free Trade Agreement, Customs Union, flexibility, coordination, geography, networks, farsighted
Length: 43 pages
Creation-Date: 2015-09
Number: 053
File-URL: http://economics.ryerson.ca/workingpapers/wp053.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp053