Hub‐and‐spoke free trade areas: theory and evidence from Israel

Abstract We study how the sequential formation of free trade areas affects trade flows between member countries. In a three‐country, three‐good model of comparative advantage if two countries have an FTA, and both sign a similar agreement with the third, trade between the two decreases. However, if only one of them signs an additional FTA, a hub‐ and‐spoke pattern arises, and trade between the initial members increases. Israel’s experience lends strong support to our model: trade between Israel and the EU, subject to an FTA since 1975, increased by an additional 29% after the introduction of the US‐Israel FTA in 1985.