Substantial attention has recently been focused on whether regional trade agreements have favourable effects on the world trading system and should be encouraged, or whether new initiatives for trade liberalization should be restricted to multilateral trade agreements that apply the mostfavoured nation (MFN) principle. This chapter addresses the question by examining a model in which countries cannot write enforceable contracts on tariffs, so that trade agreements must be self-enforcing agreements that are supported through repeated interactions between the countries. Although a number of papers have examined the effect of preferential arrangements on the multilateral trading system under the assumption that multilateral trade agreements must be self-enforcing (e.g. Bagwell and Staiger 1997a and b, 1999, Bond and Syropoulos 1996b, Bond, Syropoulos and Winters 2001)1, all of these papers have assumed that member countries can commit to tariff rates in the preferential trading arrangement. Thus, a fundamental asymmetry in commitment power is assumed between preferential agreements and the multilateral trading system.