Free trade agreements without delocation

Abstract

Small nations fear that FTAs with larger, richer nations will erode their industrial bases. These concerns are recognized in FTA and multilateral talks: small nations may explicitly or implicitly maintain higher trade barriers. Using a model where symmetric liberalization de-industrializes small, poor nations, we characterize the path of protection-asymmetries that allow liberalization without delocation. In welfare terms, the large nation prefers this no-delocation liberalization scheme only when barriers are sufficiently high; the small nation's ranking is reversed. An anti-delocation scheme involving international income transfers is also evaluated and found infeasible. © Canadian Economics Association.