Bargaining Networks in International Trade

This paper analyzes the impact of preferential trade agreements (PTAs) on mul-tilateral cooperation in a “competing exporters ” model with three countries that are asymmetrical with respect to income. We use a network formation approach in which countries can enter bilateral and multilateral trade agreements. We investigate the structure of stable trading networks and show that global free trade is an equilibrium whenever countries ’ income level is relatively similar. We also model multilateral Nash bargaining under MFN and find that when all countries have the same number of PTAs, free trade is an optimal bargaining solution. Whenever the network structure is asymmetrical in the way that some countries belong to very few PTAs and others are strongly networked, free trade cannot be achieved. We also show that countries with few PTAs benefit more from multilateral bargaining. This result implies that the increasing number of PTAs reduces countries ’ incentives for multilateral cooperation