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Free Trade Agreement and Welfare in Spatial Competition

Te Cheng Lu

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We consider a three symmetric circular countries spatial competition and three horizontal differentiated goods model to illustrate the question of whether the static welfare effect of a FTA is good.

 First, when the non-discriminate tariff rate t is relatively low, the welfare of a FTA member is better than global free trade. On the contrast, when the tariff is relatively high, the welfare of global free trade is better than a FTA member. Second, given the non-discriminate tariff rate, the welfare of a FTA member country is always better than non-member country. Third, given the non-discriminate tariff rate, the welfare of hub country is always better than member country and the welfare of spoke country is better than a FTA member country when the trade barrier is relatively low.