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Does a Bilateral FTA Pave the Way for Multilateral Free Trade?


  • An earlier version of this paper was presented at the annual meeting of the JSIE (2008, October). We would like to thank an anonymous referee, Naoto Jinji, Yasushi Kawabata, Minoru Kunizaki, Kiyoshi Matsubara, and seminar participants for their helpful comments. Any remaining errors are our responsibility. This research was financially supported by JSPS (#23730251, #23530303, #21243023).


We determine whether a bilateral free trade agreement (FTA) acts as a building block for multilateral free trade (MFT) in a three-country model with asymmetric domestic markets. Our main conclusions are as follows: (i) A bilateral FTA between two large countries can act as a building block for MFT; (ii) A bilateral FTA between two small countries acts as a stumbling block for MFT; (iii) This FTA can be Pareto improving when a multilateral trade agreement is not feasible.