|M.Sc Student||Ravid Keren|
|Subject||International Security and Trade Agreements|
|Department||Department of Industrial Engineering and Management||Supervisor||Mr. Gal Hochman|
|Full Thesis text - in Hebrew|
During the past decade, Free Trade Agreements (FTA’s) have proliferated around the world. These FTA’s are based on Article 24 of the GATT agreement and the terms of preference are usually defined by Rules of Origin (ROO’s). The objective of this paper is to examine whether FTA’s influence the level of security stability between countries, and whether it is possible to use FTA’s in order to reduce the probability of a conflict outburst. The paper focuses on FTA’s which engage in the trade of goods, and examines the efficiency of restrictive ROO’s under uncertain security conditions.
This research question is examined in the paper by a theoretical model, which defines a game between four countries: three small manufacturing countries and one large country, which represents the rest of the world. The three small countries produce an industrial good for export, and each of them is capable of producing it independently. Additionally, two of the countries can choose to collaborate in production, in the form of a Bi-Lateral Trade Agreement (BTA) or a Free Trade Agreement. The production processes are based on a model of multi-stage production by Dixit and Grossman (1982) and its expansion by Rodriguez (2001). The terms of trade are defined by a given level of tariffs. The large country is the consumer of the industrial good and can import it from each of the small countries. Its influence is expressed by its ability to impose ROO’s on the joint production within the free trade area, as a condition for applying no tariffs on its import.
The decision making process is defined by a dynamic game with imperfect information. The countries’ decisions are made under varying security conditions, and the objective of each country is to maximize welfare, under each possible level of security. The results of the analysis show that equilibrium under full security stability exists in a free trade area with no ROO’s, while equilibrium under uncertain security conditions is characterized by imposition of restrictive ROO’s on the free trade area.
These results lead to the conclusion, that FTA’s with restrictive ROO’s influence the level of security stability existing between trading countries. The paper demonstrates that given conditions of uncertainty, restrictive ROO’s in a FTA assist in reducing the security instability, thus increasing the probability of economic collaboration between the countries in dispute. The lower probability of conflict outburst reduces the costs of uncertainty and may raise the level of welfare in all countries.