Preferential Trading Agreement: Endogenous Response of the Excluded Country

In most of the current debate on regionalism versus multilateralism, the countries excluded from a Preferential Trading Agreement (PTA) are assumed to be passive players with exogenously fixed trade policies. In reality however, non−members do react to the creation of a trading bloc and relaxing this assumption can provide useful insights. Using a political economy model, this paper explore the case where those excluded countries can adjust their commercial policies in order to minimize the negative effects of the PTA. It is shown that the creation of a PTA can lead the excluded countries to increase their trade barriers with respect to the PTA members