Spaghetti Regionalism

Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 680 September 2000 SPAGHETTI REGIONALISM Caroline L. Freund NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Recent IFDPs are available on the Web at www.bog.frb.fed.us.

SPAGHETTI REGIONALISM Caroline L. Freund* Abstract: This paper examines the welfare implications of multiple free trade agreements in a model of imperfect competition. We show that free trade is the unique Nash equilibrium under the simple rule that any two countries can form a bilateral free trade agreement. Specifically, a country is always better off forming a bilateral trade agreement with every other country, irrespective of previous agreements. This suggests that each new preferential free trade agreement may be a step towards multilateral free trade. Keywords: trade, regionalism, and imperfect competition * Economist in the International Finance Division of the Federal Reserve Board. I would like to thank Pravin Krishna and Marcelo Olarreaga for helpful comments. Correspondence: Caroline Freund, International Finance Division, Federal Reserve Board, Washington D.C. 20551, e-mail: caroline.l.freund@frb.gov. The views presented here are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.

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