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Preferential Trade and Welfare with Differentiated Products

Authors

  • Denise Eby Konan,

    Corresponding author
    1. University of Hawai'i at Mānoa
      Konan: University of Hawai'i at Mānoa, Honolulu, HI 96822. Tel: 808-956-6310, Fax: 808-956-4347, E-mail: Konan@hawaii.edu. Maskus: UCB 256, University of Colorado at Boulder, Boulder CO 80309-0256. Tel: 303-492-7588, Fax: 303-492-8960, E-mail: maskus@colorado.edu.
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  • Keith E. Maskus

    Corresponding author
    1. UCB 256, University of Colorado at Boulder
      Konan: University of Hawai'i at Mānoa, Honolulu, HI 96822. Tel: 808-956-6310, Fax: 808-956-4347, E-mail: Konan@hawaii.edu. Maskus: UCB 256, University of Colorado at Boulder, Boulder CO 80309-0256. Tel: 303-492-7588, Fax: 303-492-8960, E-mail: maskus@colorado.edu.
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    • 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.


Konan: University of Hawai'i at Mānoa, Honolulu, HI 96822. Tel: 808-956-6310, Fax: 808-956-4347, E-mail: Konan@hawaii.edu. Maskus: UCB 256, University of Colorado at Boulder, Boulder CO 80309-0256. Tel: 303-492-7588, Fax: 303-492-8960, E-mail: maskus@colorado.edu.

Abstract

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.

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