Sustainability of Free Trade Agreements Under a Maximum Revenue Tariff

  • Makoto OkamuraEmail author
  • Takao Ohkawa
Part of the New Frontiers in Regional Science: Asian Perspectives book series (NFRSASIPER, volume 10)


This chapter examines the sustainability of multilateral free trade (MFT) or a bilateral free trade agreement (FTA) in a welfare-maximizing tariff regime compared with that in a revenue-maximizing tariff regime. To do so, we construct a framework consisting of three countries, each of whose markets are segmented, and three firms, each of which supplies its product in the three markets. We examine the sustainability of the FTAs by using a repeated game setting. We establish the following: (1) MFT is less sustainable in a revenue-maximizing tariff regime than in a welfare-maximizing tariff regime, while a bilateral FTA has almost the same sustainability in both regimes. (2) Suppose that a bilateral FTA is formed. Expansion of the FTA is more sustainable in a revenue-maximizing tariff regime than in a welfare-maximizing tariff regime. An FTA may be a building block (a stumbling block) to MFT in a revenue-maximizing tariff regime (a welfare-maximizing tariff regime).


FTA MFT Sustainability Welfare-maximizing tariff regime Revenue-maximizing tariff regime 



This work was supported by Grants-in-Aid for Scientific Research (no. 23530303, 26380340, and 15K03492). All remaining errors are ours.


  1. Bergstrom, T.C., and H.R. Varian. 1985. Two remarks on Cournot equilibria. Economics Letters 19: 5–8.CrossRefGoogle Scholar
  2. Brennan, G., and J.M. Buchanan. 1977. Towards a tax constitution for Leviathan. Journal of Public Economics 8: 255–273.CrossRefGoogle Scholar
  3. Clarke, R. and D.R. Collie. 2006. Optimum-welfare and maximum-revenue tariffs under Bertrand duopoly. Scottish Journal of Political Economy 53: 398–408.CrossRefGoogle Scholar
  4. Collie, D.R. 1991. Optimum welfare and maximum revenue tariffs under oligopoly. Scottish Journal of Political Economy 38: 398–401.CrossRefGoogle Scholar
  5. Edwards, J., and M. Keen. 1996. Tax competition and Leviathan. European Economic Review 40: 113–134.CrossRefGoogle Scholar
  6. Freund, C. 2000. Multilateralism and the endogenous formation of preferential trade agreements. Journal of International Economics 52: 359–376.CrossRefGoogle Scholar
  7. Fung, K. C., and P.H. Schneider. 2005. Asymmetric integration. International Journal of Applied Economics 2: 83–110.Google Scholar
  8. Itaya, J.-I., M. Okamura, and C. Yamaguchi. 2014. Partial tax coordination in a repeated game setting. European Journal of Political Economy 34: 263–278.CrossRefGoogle Scholar
  9. Missios, P., and H.M. Yildiz. 2015. Do South-South preferential trade agreements undermine the prospects for multilateral free trade? Canadian Journal of Economics (forthcoming).Google Scholar
  10. Nielsen, M.E.B. 2006. The endogenous formation of sustainable trade agreements. Revista de Economía del Rosario 9: 61–94.Google Scholar
  11. Saggi, K. 2006. Preferential trade agreement and multilateral tariff cooperation. International Economic Review 47: 29–57.CrossRefGoogle Scholar
  12. Saggi, K., F. Sengul, and H.M. Yildiz. 2007. Sustaining multilateral cooperation among asymmetric countries: does MFN help? International Review of Economics and Finance 16: 543–562.CrossRefGoogle Scholar

Copyright information

© Springer Japan 2016

Authors and Affiliations

  1. 1.Faculty of Economics, Gakushuin UniversityTokyoJapan
  2. 2.Faculty of Economics, Ritsumeikan UniversityKusatsuJapan

Personalised recommendations