Please find my Research Statement here.
Dissertation title: "Essays on Static and Dynamic Free Trade Agreement Formation: Role of Economies of Scale and Tariff Bindings"
Title: “Role of Economies of Scale for the External Tariffs and Trade Agreement Formation: A Theoretical and Empirical Investigation,” (Job Market Paper), with Andrey Stoyanov and Halis Murat Yildiz (working paper) PDF
Abstract: In this paper, we provide a comprehensive theoretical and empirical analysis of the role of economies of scale on external tariff setting following the formation of free trade agreements (FTAs). We build an oligopoly model of trade with flexible degrees of economies of scale and show that the member countries have an incentive to reduce their external most favored nation (MFN) tariffs following the FTA formation regardless of the degree of economies of scale. We further show that such effect strengthens as the degree of economies of scale rises. We empirically test these predictions and confirm that post-FTA tariff adjustments are consistent with our theoretical expectations, highlighting the importance of incorporating the economies of scale in the FTA analysis. We do so by developing a three-country dynamic FTA formation model to examine how the degree of economies of scale shapes the welfare implications of FTA formation and countries’ incentives to enter into such agreements. Our findings suggest that the equilibrium path of FTA formation is fundamentally shaped by the degree of economies of scale in production technology: when countries exhibit strong preference for short-term gains, the FTAs are more likely to lead to global free trade with increasing or decreasing economies of scale than with constant return to scale.
Title: “Economies of Scale, Tariff Bindings and Dynamic Free Trade Agreement Formation,” with Halis Murat Yildiz (working paper) PDF
Abstract: In this paper, we provide a comprehensive theoretical analysis of the role of lower tariff bindings and degrees of economies of scale on trade, trade policy, and welfare implications following the formation of free trade agreements (FTAs). Focusing on optimal tariffs, we first build an oligopoly model of trade with flexible degrees of economies of scale and show that the change in the optimal external tariffs of member and non-member countries due to FTA formation heavily depends upon the degrees of economies of scale. Next, we move to the dynamic FTA formation model under optimum tariffs, and show that the equilibrium path of FTA formation reaches global free trade unless countries are sufficiently myopic and this outcome is more likely under economies and diseconomies of scale relative to constant returns to scale. Then, we deviate from optimum tariffs to the case where countries are bound by exogenous tariff bindings and analyze how tariff binding liberalization impacts the equilibrium path of FTA formation with different degrees of economies of scale. We find that starting with sufficiently high tariff bindings, tariff binding liberalization initially facilitates FTA formation leading to global free trade via the reduction in dynamic free riding incentives. This result is more likely to occur with stronger economies of scale. However, as tariff bindings decline further, tariff binding liberalization hinders the extension of the FTA formation process to global free trade, with these negative effects being stronger in the presence of economies of scale.
Title: “Bilateralism versus Multilateralism: Role of Economies of Scale for the Prospect of Global Free Trade,” with Halis Murat Yildiz (working paper)
Abstract: In this paper, we examine how the freedom to pursue free trade agreements (FTAs) affects the external tariffs, welfare of countries and the prospect of global free trade relative to MFN-based trade liberalization when industry exhibits flexible degrees of economies of scale in an imperfectly competitive environment. We show that both the degree of asymmetry in market sizes across countries and the degree of economies of scale are pivotal in determining: (i) the external tariffs of both member and non-member countries; (ii) the strength of free riding incentive of the non-member country and exclusion incentives of member countries, and (iii) whether the ability to form FTAs acts as building or stumbling blocks towards global free trade. We first show that, under both bilateralism and multilateralism games, global Free Trade is the unique CPNE when countries are relatively symmetric in market size and such an outcome is more likely as the degree of economies of scale rises. We then show, when countries are sufficiently asymmetric in market size, that the ability to form bilateral FTAs can be necessary to reach global free trade: global free trade can fail to arise as CPNE under MFN based game while it is the unique CPNE under the FTA game. Over this range, we argue that the ability to form bilateral FTAs acts a strong building block for the prospect of multilateral free trade and this outcome becomes more likely as the degree of economies of scale rises.
Title: “Free Trade Agreements and Multilateral Cooperation: Role of Economies of Scale and Tariff Binding Liberalization,” with Jaeyeon Kim and Halis Murat Yildiz (work in progress)
Abstract: To address whether free trade agreements (FTAs) facilitate or hinder multilateral cooperation over tariffs with the continual reduction in tariff bindings, this paper uses an infinitely repeated tariff game between three countries engaged in intra-industry trade under oligopoly with a flexible degree of economies of scale. We first confirm the results in the existing literature (Saggi, 2006) in an environment where countries apply optimal tariffs and industries exhibit constant returns to scale (CRS): under a bilateral FTA, the free-riding incentive of the non-member country is pivotal and thus its incentive is binding for the sustainability of multilateral cooperation, and the critical discount factor under a bilateral FTA exceeds the one under no agreement. Therefore, FTAs hinder the sustainability of multilateral cooperation relative to the MFN regime under optimal tariffs with CRS. When we examine the scenario where bound tariffs are smaller than the optimal tariffs, we find that exclusion incentives rather than free-riding incentives become more pivotal as the binding tariffs decline. Therefore, FTA member countries’ incentive becomes binding for the sustainability of multilateral cooperation when the bound tariffs are sufficiently low. More surprisingly, when bound tariffs are at an intermediate level, we find that the formation of bilateral FTAs can facilitate multilateral cooperation relative to no agreement. When we examine the role of economies of scale, our findings inform us that these results continue to hold regardless of the degrees of economies of scale.
Title: “The Role of Economies of Scale: Analyzing the Impact of the Canada–US Free Trade Agreement on Canadian Multilateral Trade Liberalization” (work in progress)
Abstract: We provide an empirical analysis of the role of economies of scale in shaping external tariff policies for Canada following the formation of Canada-US Free Trade Agreement (CUSFTA) Our findings show that tariff preferences under the CUSFTA contributed to a decline in Canadian external tariffs, with a significant reduction in the average tariff between 1989 and 1998, as measured using the 6-digit HS industry classification. Additionally, we show that this effect strengthens as the degree of economies of scale rises.