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Abstract
This paper summarizes recent research by the authors on the effects of tree trade areas
(FTAs). Within our model, which emphasizes inter-continental transport costs, several
conclusions arise. (1) FTAs are likely to be detrimental over a moderate range of parameter
values, even if drawn along natural regional lines. (2) A small margin of preferences for
neighbors is beneficial. (3) Optimal preferences depend on the parameters, particularly on
transport costs. (4) If preferences are raised futther, they enter the zone of negative returns to
regionalization, and eventually the super-natural zone, where welfare is lower than under the
MFN status quo. Estimates from the gravity model suggest the world system may already be
in the super-natural zone. The core model leaves out many factors. But we have pursued a
variety of extensions by now. Perhaps the two most important are generalizing the highly
stylized model of trade (to include factor endowments), and relaxing the assumption that the
inter-bloc level of tariffs remains fixed. In the latter case, allowing tariffs to be endogenous
yields a much more optimistic outlook for the effects of FTAs.