We appreciate the insights of James Cassing, Brian Copeland, Keith Head, Bjarne Jensen, Carsten Kowalczyk, Raymond Riezman, Rodney Tyers, and seminar participants at Australian National University and Kobe University. We are also grateful to two anonymous referees for comments that improved the analysis.
Preferential Trade and Welfare with Differentiated Products
Article first published online: 19 OCT 2012
© 2012 Blackwell Publishing Ltd
Review of International Economics
Volume 20, Issue 5, pages 884–892, November 2012
How to Cite
Konan, D. E. and Maskus, K. E. (2012), Preferential Trade and Welfare with Differentiated Products. Review of International Economics, 20: 884–892. doi: 10.1111/roie.12001
- Issue published online: 19 OCT 2012
- Article first published online: 19 OCT 2012
We consider analytically and numerically the welfare tradeoffs inherent in a preferential trade area (PTA) with products differentiated by region of origin. For a small open economy in such a setting, welfare gains are associated with higher trade volumes within the PTA. However, welfare losses are induced by declining tariff revenues on trade with non-member countries. We show that both effects are concave, while one is a non-monotonic and the other a potentially non-monotonic function of pre-PTA partner trade shares. Therefore, the relationship between initial partner import shares and direct static welfare impacts of a PTA are theoretically ambiguous. This finding contrasts with conventional results in the homogeneous-goods case, whereby the smaller is the pre-agreement trade volume with a potential partner the more beneficial is a PTA.