The Stable Equilibrium of Preferential Trade Agreements under Technology Asymmetry

Abstract

This paper examines the optimal policy for trade negotiation in the current multilateral and preferential trade regime. Using a four country oligopoly model with asymmetric technology, we examine the implication of preferential trade agreement on tariff and welfare. We find any preferential trade agreement has a tariff complementarity effect. Social welfare of the more efficient country is also higher with more cooperative trade negotiation regime. However, for technically inefficient country, the cooperative trade policy does not always guarantee to improve the social welfare when the technology difference is large or the global free trade is not feasible. Under large technology difference, we show that South-South FTAs is an optimal alternative policy for the inefficient countries and is more sustainable.

Keywords

• Preferential Trade Agreement
• Technology Asymmetry
• Tariff Complementary
• Cournot Oligopoly
• Coalition-Proof Nash Equilibrium