An Analysis of Preferential Trade Agreements

Abstract

This paper uses the new economic geography approach to analyze the effects of preferential trade agreements on industrial location and welfare. The tariff reductions lead to higher concentrations of firms in countries that enter a preferential trade agreement. Consequently, the welfare of member countries increases, but that of non-member countries may not. If preferential trade agreements have a hub-and-spoke structure, they will make more firms move to the hub, and welfare will increase in all countries