DP5960 Hub-and-Spoke Free Trade Areas

Author(s): George Deltas , Klaus Desmet , Giovanni Facchini

Publication Date: November 2006

Keyword(s): hub-and-spoke , free trade areas , trade volumes , Israel

JEL(s): F11 , F13

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP5960.asp.asp

This paper analyzes how the sequential formation of free trade areas affects the volume of trade between member countries. In a three--country, three--good model, if two countries have a free trade area, and both sign a similar agreement with the third, trade between the two decreases, and welfare rises in both. However, if only one of them signs an FTA with the third, a hub-and-spoke pattern arises. If the two spokes have a comparative advantage in different goods, trade between the two countries in the initial FTA increases, with welfare rising in the hub and falling in the spoke. We provide evidence consistent with the theoretical model when studying the experience of Israel.