Preferential trade agreements as building or stumbling blocs? The importance of commitment

Will continual expansion of preferential trade agreements (PTAs) lead to global free trade? In the presence of multilateral negotiations, are PTAs necessary for, or will they necessarily lead away from, global free trade? This paper shows both answers depend crucially on a commitment problem faced by PTA members. Because the commitment problem revolves around a desire to commit to not form future PTAs, global free trade is not attained when PTA member's overcome their commitment problem. Market size asymmetry is an important determinant of member's ability to overcome the commitment problem. Higher levels of asymmetry generally increase member's rents and thus their ability to overcome it. This reduces the scope for global free trade. However, there is a threshold level of asymmetry at which the commitment problem cannot be overcome. This dramatically increases the extent to which PTAs both lead to, and are necessary for, global free trade.