| In recent years there has been more research on using network structures to explain economic and social relationships. In our study, we are interested in trade networks where two countries are linked if they have a free trade agreement (FTA) which eliminates tariffs between the two countries. Examples about free trade agreements include the North American Free Trade Agreement (NAFTA) among the United States, Canada, and Mexico. Another example is of Australia and New Zealand who signed the Closer Economic Relations Agreement in 1983, and of Australia who recently signed an FTA with Singapore.;This dissertation consists of three chapters in which the stability of trade networks is examined when tariffs are exogenously given; when they are endogenously determined; and when countries are faced with transportation costs.;Chapter one studies a setting with three countries A, B, and C that trade two differentiated products. There is a single firm in each country, and firms A, B, and C compete as Cournot oligopolists. Firm A and firm B produce one good, and firm C produces another. The countries can form bilateral FTAs with each other, which simply means that they have tariff-free entry to the member countries markets. The initial import tariff in each country is exogenously given. We show that either a complete free trade network and/or a trade network where country A and country B sign an FTA but country C is isolated may be stable. When the two products are highly substitutable, the complete free trade network is the stable and unique efficient network.;In chapter two, we analyze the case where tariffs are endogenously determined and countries can choose their optimal tariffs. Similarly, we use a three-country model in which three countries trade two differentiated products. We would like to examine whether countries A, B, and C have incentives to sign FTAs and whether a stable free trade network can be achieved when tariffs are endogenous. We show that no matter whether goods 1 and 2 are highly substitutable or not, a complete free trade network is always the unique pairwise stable network.;In the last chapter, distance and transportation costs are added to the basic model with endogenous tariffs. The main question we would like to answer in this chapter is whether a global trade liberalization or regional trade agreements can be formed. Interestingly, we find that countries' incentives to form FTAs largely depend on the distance between each country. If countries are located in different regions with different distance with each other, hub-and-spokes trade networks or trade networks where countries A and B are linked can be pairwise stable networks. However, when there is no transportation cost, a complete free trade network is the unique pairwise stable network. |
