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In
a model where governments have political, as well as economic, motivations, I
show that a free trade area induces its members to reduce protection against
the non-members, and to do so sufficiently deeply to generate overall trade
creation.
Trade
creation amplifies the excluded countries’ access to the integrating markets,
but also reduces their extra gains from multilateral liberalization. Thus,
trade creation can reverse the support of the excluded countries to
liberalization on a multilateral basis.
This
is more likely to happen when governments outside the free trade area are
more responsive to special interests.
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