YALE DEPARTMENT OF ECONOMICS
WORKING PAPER NO. 45

TITLE

Author(s)

Month Year

CAN A PREFERENTIAL TRADE AGREEMENT BENEFIT
NEIGHBOR COUNTRIES WITHOUT COMPENSATING THEM?

Masahiro Endoh, Koichi Hamada, and Koji Shimomura

March 2008

PTAs are generally negotiated without any tariff concessions or transfers to non-member countries. Can such a PTA benefit the neighbors' welfare? In a two-good competitive equilibrium model in the absence of an entrepot, a PTA without concessions to the outsider will hurt the outsider's welfare when goods are normal. If one of the member countries is an entrepot, however, it definitely improves the neighbors' welfare. In a multiple-good model, a PTA without concessions deteriorates the neighbors' welfare, provided that all the goods are normal and substitutes, and that initial tariff levels are small.

Keywords: PTA, Neighbor's welfare, Kemp-Wan theorem, WTO, GATT Article 24, Entrepot

JEL classification: F11, F13, F15