Abstract

This paper examines the impact of free trade areas (FTAs) on the world trading system. It uses a partial equilibrium framework among three countries where Cobb-Douglas utility function is applied. It is found that FTAs are primarily detrimental to multilateral trading system and are stumbling blocs to global free trade (GFT), whether in a symmetric or an asymmetric case. This conclusion is based, firstly, upon the findings that the utility of member countries in a FTA are higher than status quo, so they are interested in forming a FTA, and secondly, after forming a FTA, they don't have incentive to let the third country join in since their utility would be lowered. In addition, this paper shows that when there are two large countries and a small one, it is more profitable for one large country to form a FTA with the small one instead of the other large one.

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