Should the WTO require free trade agreements to eliminate internal tariffs

Abstract In a three-country model of endogenous free trade agreements (FTAs), we study the effects of requiring FTA members to eliminate tariffs on one another, as is essentially stipulated under current WTO rules. We explain why, in the absence of such a requirement, FTAs members impose positive tariffs on each other even when maximizing their joint welfare. We show that requiring FTA members to eliminate internal tariffs induces them to lower their external tariffs. Such external trade liberalization by FTA members undermines the prospects of global free trade since it reduces the non-member's incentive to enter into trade agreements with them.