FREE TRADE AGREEMENTS AS DYNAMIC FARSIGHTED NETWORKS

In the presence of multilateral negotiations, are Free Trade Agreements (FTAs) necessary for, or will they prevent, global free trade? I answer this question using a dynamic farsighted model of network formation among asymmetric countries. Ultimately, FTAs prevent global free trade when there are two larger countries and one smaller country but FTAs can be necessary for global free trade when there are two smaller countries and one larger country. The model provides insights into the dynamics of recent real-world negotiations and recent results in the literature on the empirical determinants of trade agreements. (JEL C71, F12, F13)