Abstract

Suppose a particular developing country (e.g., Mexico or Chile) joins in a free trade area (FTA) with a very large economy (e.g., the United States): what are the possible gains and losses to it? The first part of this paper provides a framework for analyzing this problem. The main theme is that there are three distinct aspects, namely, trade liberalization, trade diversion, and reciprocity. The developing country will be referred to here as the LAC (Latin American country) and the large country as the United States. Finally, the second part of the paper compares regional and multilateral trade liberalization.1