The Scandinavian Journal of Economics

Gnutzmann, Hinnerk; Gnutzmann‐Mkrtchyan, Arevik; Korn, Tobias

doi: 10.1111/sjoe.70005pmid: N/A

Empirical models of trade agreements implicitly assume that withdrawal from a trade agreement has an equal and opposite trade effect as accession (i.e., symmetry). With increasing opposition to international economic cooperation, it becomes urgent to test this assumption. We analyze a quasi‐natural experiment to explicitly test the symmetry assumption in the context of the termination of a free trade agreement (FTA) using the gravity model. In 2004, Estonia joined the European Union, which mandated that it withdraw from its FTA with Ukraine. Carefully controlling for possible confounding effects of European Union enlargement using a variety of methods, we isolate the FTA withdrawal effect and find strong support in favour of symmetry. Moreover, while import tariffs matter, the bulk of the effect comes from non‐tariff effects of an FTA. General equilibrium estimates suggest that the FTA withdrawal led to a noticeable welfare loss for members.

Suga, Nobuhito; Yanase, Akihiko; Tawada, Makoto

doi: 10.1111/sjoe.70007pmid: N/A

In this study, we analyze a symmetric policy game in a two‐country model in which domestic policy affects a Ricardian comparative advantage. Considering a two‐good, one‐factor set‐up in which each country's government provides a productive public good, we show that ex ante identical countries under free trade always choose different levels of public goods in the Nash equilibrium – meaning symmetry‐breaking always occurs. We also examine how our analysis is modified in the presence of trade costs and in a multi‐good set‐up. Moreover, we present a more elaborate model with input–output linkages and entry regulation in an upstream market as an application.