The Welfare Effect Analysis Of FTA In A Multi-countries Model

The overall tariff level has been falling dramatically since the Second World War. At the same time, the number of preferential trading agreements (PTAs) approved by the GATT/WTO has increased significantly. A new wave of regional free trade has been spreading all over the world since the 1990s. Although FTAs are flourishing in practice, almost all the theoretical research on PTAs focus on the field of customs unions.On the basis of expatiating on the theory of free trade area and correcting the existing model, this paper uses a multi-countries, multi-good oligarch competition trade model to analyze how the formation and expansion of a FTA affects the welfare levels of participating countries, the non-member countries, and global free trade. The paper shows that, in a multi-countries model, the individual country's Nash equilibrium tariff level is not related with the tariffs implemented by other countries, but negatively related with the number of countries in the world. Countries in a FTA will choose the optimal tariff based on their own welfare. Because of the spillover effect of tariff reduction, the external tariff level of FTA's member country is lower than its Nash equilibrium tariff level. This paper analyzes how the expansion of a FTA affects the welfare levels of member countries, the non-member countries, and the relationship between FTA and global free trade. This paper also analyzes the critical condition for abiding FTA agreement by using an infinitely repeated game model.After using this model to analyze the AFTA and East Asia economy cooperation, we find that the formation and expansion of AFTA has both positive and negative welfare effects on member countries, and the final effect depends on the comparison between them. Economic Development of AFTA countries depends on the outside economy, moreover, the relationship of the industry structure of AFTA countries and development countries is complementary, so the effect of tariff reduction exceeds the effect of competition. The welfare of non-member countries increases along with the extension of AFTA.