Sustainability of Free Trade Agreements Under a Maximum Revenue Tariff
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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).
KeywordsFTA 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.
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