We consider a two-period model of a three-country world with free trade in finished products and some factor mobility, where production is subject to uncertainty. Enterpreneurs may establish production in other countries but can obtain financing only in the country of origin. In this model, integrating production across countries, in particular integrating economically strong and weak partners, may give rise to a welfare loss, showing that traditional views on efficiency of international trade must be reconsidered when risk and uncertainty are taken into account.
References
[1]
Viner, J. (1950) The Customs Unions Issue. Carnegie Endowment for International Peace, New York.
[2]
Vanek, J. (1965) General Equilibrium of International Discrimination: The Case of Customs Unions. Harvard University Press, Cambridge, MA.
[3]
Gandolfo, G. (2014) International Trade. 3rd Edition, International Trade Theory and Policy, Springer-Verlag, Berlin Heidelberg.
[4]
Helpman, E. and Razin, A. (1978) A Theory of International Trade under Uncertainty. Academic Press, New York.
[5]
Hoff, K. (1996) A Reexamination of the Neoclassical Trademodel under Uncertainty. Journal of International Economics, 36, 1-27. http://dx.doi.org/10.1016/0022-1996(94)90055-8
[6]
Newbery, D.M.G. and Stiglitz, J.E. (1984) Pareto Inferiortrade. Review of Economic Studies, 51, 1-12.
http://dx.doi.org/10.2307/2297701
[7]
Tille, C. (2005) The Welfare Effect of International Asset Market Integration under Nominal Rigidities. Journal of Intenational Economics, 65, 221-247.
[8]
Kemp, M.C. and Wan, H. (1976) An Elementary Proposition Concerning the Formation of Customs Unions. Journal of International Economics, 6, 95-97.
[9]
Markusen, J.R. and Venables, A.J. (1998) Multinational Firms and the New Trade Theory. Journal of International Economics, 46, 183-203. http://dx.doi.org/10.1016/S0022-1996(97)00052-4
[10]
Markusen, J.R. and Venables, A.J. (2000) The Theory of Endowment, Intra-Industry and Multi-National Trade. Journal of International Economics, 52, 209-234.
[11]
Rauch J.R. and Watson, J. (2004) Network Intermediaries in International Trade. Journal of Economics & Management Strategy, 13, 69-93. http://dx.doi.org/10.1111/j.1430-9134.2004.00004.x
[12]
Yu, Z. (2002) Entrepreneurship and Intra-Industry Trade. Weltwirtschaftliches Arkiv, 138, 277-289.
http://dx.doi.org/10.1007/BF02707745
[13]
Wu, J.P. (2005) Trade Agreements as Self-Protection. Review of International Economics, 13, 472-484.
http://dx.doi.org/10.1111/j.1467-9396.2005.00518.x
[14]
Amiti, M. (1998) Inter-Industry Trade in Manufactures: Does Country Size Matter? Journal ofInternational Economics, 44, 231-255.
[15]
Bond, E.W., Syropoulos, C. and Winters, L.A. (2001) Deepening of Regional Integration and Multilateral Trade Agreements. Journal of International Economics, 53, 335-361. http://dx.doi.org/10.1016/S0022-1996(00)00064-7
[16]
Ornelas, E. (2005) Trade Creating Free Trade Areas and the Undermining of Multilateralism. European Economic Review, 49, 1717-1735. http://dx.doi.org/10.1016/j.euroecorev.2004.03.010
[17]
Abrego, L., Riezman, R. and Whalley, J. (2006) How Often Are Propositions on the Effects of Regional Trade Agreements Theoretical Curiosa? Journal of International Economics, 68, 59-78.
http://dx.doi.org/10.1016/j.jinteco.2005.03.003
[18]
Chipman, J.S. (1974) Homothetic Preferences and Aggregation. Journal of Economic Theory, 8, 26-38.
http://dx.doi.org/10.1016/0022-0531(74)90003-9
[19]
Leland, H.E. and Pyle, D.H. (1977) Informational Asymmetries, Financial Structure and Financial Intermediation. The Journalof Finance, 32, 371-387. http://dx.doi.org/10.2307/2326770
[20]
Diamond, D. (1984) Financial Intermediation and Delegated Monitoring. Review of Economic Studies, 51, 393-414.
http://dx.doi.org/10.2307/2297430
[21]
Hatta, T. (1977) A Theory of Piecemeal Policy Recommendations. The Review of Economic Studies, 44, 1-21.
http://dx.doi.org/10.2307/2296969
[22]
Ju, J. and Krishna, K. (2005) Welfare and Market Access Effect of Piecemeal Tariff Reform. Journal of International Economics, 51, 305-316. http://dx.doi.org/10.1016/S0022-1996(99)00024-0
[23]
Gale, D. and Mas-Colell, A. (1975) An Equilibrium Existence Theorem for a General Model without Ordered Preferences. Journal of Mathematical Economics, 2, 9-15.
