Networks of Free Trade Agreements Among Heterogeneous Countries

Abstract

The paper examines the formation of free trade agreements as a network formation game. We consider a three-country model in which international trade occurs between economies with imperfectly competitive product markets. Labor markets can be unionized and non-unionized in each country. We show that if all countries are of the same type (all of them are either unionized or non-unionized), the global free trade network is both the unique pairwise stable network and the unique efficient network. If some countries are unionized while others are non-unionized, other networks apart from the global free trade network are likely to be pairwise stable. However, the efficient network is always the global free trade network. Thus, a conflict between stability and efficiency may occur. Moreover, starting from the network in which no country has signed a free trade agreement, all sequences of networks due to continuously profitable deviations do not lead (in most cases) to the global free trade network, even when global free trade is stable.

Endogenous Free Trade Agreements and International R&D Networks

“…However, the global free trade network was stable when labor markets were symmetric across countries. As Mauleon et al () do, in this paper, we examine the endogenous formation of FTAs . But we also look at the formation of international R&D networks, aiming to shed some light on the possible interaction effects between FTAs and R&D networks.…”

“…Goyal and Moraga‐González, ; Song and Vannetelbosch, ; Zikos, ; Marinucci, ; Kesavayuth et al, ) or a network of FTAs (e.g. Goyal and Joshi, ; Furusawa and Konishi, ; Mauleon et al, ) emerges in equilibrium . Goyal and Moraga‐González () were the first to study the endogenous formation of R&D networks and the efficiency properties therein.…”

“…Mauleon et al () investigated the formation of FTAs among countries. Assuming that in each country there is a firm, which is either unionized or nonunionized, they showed that when labor markets are asymmetric, free trade is discouraged: the global free trade network is not an equilibrium outcome.…”

“…Second, our paper contributes to the literature on FTA networks (e.g. Goyal and Joshi, ; Furusawa and Konishi, ; Mauleon et al, ), which examines the formation of FTAs as a network formation game. We broaden this focus by considering the potential effects of FTAs on the formation of international R&D networks, developing a model of double‐layer networks, where the FTA architecture is endogenously determined in the first network layer, while the structure of the R&D network emerges in the second network layer.…”

Using network analysis to study globalization, regionalization, and multi-polarity—Introduction to special section

“…Saggi & Yildiz (2010 extend this result and explore its limitations. Mauleon et al (2010) analyze the trade-off between the stability and the efficiency of different outcomes of the network formation game. Zhang et al (2014) offer a dynamic extension of these models, reinforcing their main conclusion about the tendency toward global free trade.…”