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Industrial targeting in free trade areas with policy independence

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Abstract. 

We investigate the limits of a mechanism for free trade area (FTA) formation that simultaneously satisfies internal industrialization targets. For arbitrary targets, we find necessary and sufficient conditions that guarantee that the mechanism is efficient for member countries individually, even if other members do not implement the efficient policy. When the objective is conservative – designed to protect the level of industrialization previously achieved by the target industry – member countries are guaranteed gains from the efficient policy and their FTA participation. The analysis covers cases with transportation costs and explains why minimally restrictive rules of origin support efficiency and policy independence.
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Keywords: D60; F13; F15

Document Type: Research Article

Affiliations: 1: Department of Economics, Baylor University 2: Department of Economics, University of North Dakota

Publication date: 2008-08-01

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