Seminar: Mark Melatos, University of Sydney.

Title: Title: Flexibility in Trade Bloc Design.

A key characteristic of any trade bloc is its “flexibility” – the degree to which member countries are able to modify or augment an existing agreement. This paper investigates how prospective trade bloc members value the flexibility of a proposed trade agreement given that the future trading environment may change. It is demonstrated that a stochastic trading environment can influence the formation and design of trade agreements. In particular, depending on the nature of the change in the trading environment countries may prefer to establish either more or less flexible trade blocs. Moreover, we show that the desire for trade bloc flexibility is consistent with two stylised facts in RTA formation – the overwhelming preference for free trade areas over customs unions and the existence of overlapping trade agreements.