Hub-and-Spoke Free Trade Areas

This paper is an output of the Research Training Network 'Trade, Industrialisation and Development' (Contract No. HPRN-CT-2002-00236) funded through the Improving Human Potential activity of the European Commission's Fifth Framework ProgrammeThis paper analyzes how the sequential formation of free trade areas affects the volume of trade between member countries. In a three--country, three--good model, if two countries have a free trade area, and both sign a similar agreement with the third, trade between the two decreases, and welfare rises in both. However, if only one of them signs an FTA with the third, a hub-and-spoke pattern arises. If the two spokes have a comparative advantage in different goods, trade between the two countries in the initial FTA increases, with welfare rising in the hub and falling in the spoke. We provide evidence consistent with the theoretical model when studying the experience of Israel.Financial aid from the Spanish Ministerio de Educación y Ciencia (SEJ2005-05831) and the Fundación Ramón Areces is gratefully acknowledge