Preferential versus multilateral trade liberalization and the role of political economy (original) (raw)
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Trade Policies Based on Political Externalities: An Exploration, Third Version
SSRN Electronic Journal, 2000
During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-oftrade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper addresses intergovernmental political externalities in a model with terms-of-trade externalities. The model resolves the Terms-of-Trade Puzzle if and only if political externalities dominate terms-of-trade externalities. But it resolves the Anti-Trade-Bias Puzzle, and delivers results consistent with what we actually observe, only if terms-of-trade externalities play no role whatsoever.
American Economic Journal: Microeconomics, 2013
This paper analyzes a game of trade policy (called Bilateralism) between three countries in which each country chooses whether to liberalize trade preferentially in the form of a Customs Union (CU), multilaterally, or not at all. We also analyze a restricted version of this game (called Multilateralism) under which countries do not have the option to form CUs. The analysis sheds light on the relationship between multilateral and preferential trade liberalization as sanctioned by GATT Article XXIV. We …nd that when countries have symmetric endowments, global free trade can be achieved without permitting CUs. Allowing for asymmetry, we isolate circumstances where Article XXIV helps further the cause of multilateral liberalization as well as when it does not. Furthermore, we show that Article XXIV's stipulation -that countries forming a CU not raise tari¤s on outsiders -fails to make multilateral liberalization any more attractive to countries. However, such a tari¤ restriction does lower the adverse impact of a CU on the non-member. . Parts of this paper were written during my visit to the Stanford Center for International Development (SCID), Stanford University, Palo Alto, CA. I am grateful to SCID researchers and its administrative sta¤ for providing me with an excellent research environment.
A Political-Economy Theory of Trade Agreements
2005
This paper presents a theory of trade agreements where "politics" play an central role. This stands in contrast with the standard theory, where even politically-motivated governments sign trade agreements only to deal with terms-of-trade externalities. We develop a model where governments may be motivated to sign a trade agreement both by the presence of standard terms-of-trade externalities and by the desire to commit vis-à-vis domestic industrial lobbies. The model is rich in implications. In particular, it predicts that trade agreements result in deeper trade liberalization when governments are more politically motivated (provided capital mobility is su¢ ciently high) and when capital can move more freely across sectors. Also, governments tend to prefer a commitment in the form of tari¤ ceilings rather than exact tari¤ levels. In a fully dynamic speci…cation of the model, trade liberalization occurs in two stages: an immediate slashing of tari¤s and a subsequent gradual reduction of tari¤s. The immediate tari¤ cut is a re ‡ection of the terms-of-trade motive for the agreement, while the domestic-commitment motive is re ‡ected in the gradual phase of trade liberalization. Finally, the speed of trade liberalization is higher when capital is more mobile across sectors.
Policy Research Working Papers, 2005
Preferential trade agreements (PTAs) are characterized by liberalization with respect to only a few partners and thus they can potentially clash with, and retard multilateral trade liberalization (MTL). Yet there is almost no systematic evidence on whether the numerous existing PTAs actually affect MTL. We provide a model showing that PTAs hinder MTL unless they entail accession to a customs union with internal transfers.
Journal of International Economics, 2008
Preferential trade agreements (PTAs) are characterized by liberalization with respect to only a few partners and thus they can potentially clash with, and retard multilateral trade liberalization (MTL). Yet there is almost no systematic evidence on whether the numerous existing PTAs actually affect MTL. We provide a model showing that PTAs hinder MTL unless they entail accession to a customs union with internal transfers. Using product-level tariffs negotiated by the European Union (EU) in the last two multilateral trade rounds we find that several of its PTAs have clashed with its MTL. However, this effect is absent for EU accessions. Moreover, we provide new evidence on the political economy determinants of trade policy in the EU.
Trade Agreements Based on Political Externalities, Second Version
SSRN Electronic Journal, 2000
During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-oftrade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements. This paper introduces intergovernmental political externalities into a model with terms-of-trade externalities. It delivers results consistent with what we actually observe, and thus resolves the puzzles, if and only if political externalities dominate terms-of-trade externalities.
2005
Trade relations are governed by the multilateral GATT, whereas the avoidance of international double taxation rests on a network of around 2000 bilateral treaties. Given the two regimes' similar economic rationales this difference between bilateralism in international double tax avoidance and multilateralism in the trade regime poses an empirical puzzle. In this paper we develop an answer to this puzzle.
Can bilateralism ease the pains of multilateral trade liberalization?
European Economic Review, 2001
Using the in uence-driven approach to endogenous trade-policy determination, we show h o w a free-trade agreement ( fta) with rules of origin can work as a device to compensate losers from trade liberalization. The fta constructed in this paper is characterized by external tari structures that are negatively correlated across member countries, ensuring e ciency gains and, through reduced average protection, compatibility with the multilateral trading system's requirements. It is also politically viable, and we demonstrate that, in the countries concerned, governments are willing to include its formation in the political agenda in spite of the fact that, in equilibrium, political contributions from producer lobbies decline after the agreement. JEL classi cation numbers: F11, F13, F15
The Political Economy of Preferential Trade Agreements: Latin America and Beyond
Latin American Politics and Society, 2012
In this paper, we develop a political economy model to study the decision of representative democracies to join a preferential trading agreement (PTA), distinguishing between free trade areas (FTA) and customs unions (CU). Our theoretical analysis suggests that income inequality and bilateral trade imbalances are important factors in determining the formation of PTAs, while differences in production structure among prospective member countries determine whether a CU or an FTA will emerge in equilibrium. Using a sample of 136 countries over the period 1960-2005, our empirical analysis lends strong support to these predictions: Income inequality and trade imbalances both reduce the likelihood of PTA formation, while geographical specialization increases the conditional probability of an FTA (over a CU).
Preferential Trade Agreements and Rules of the Multilateral Trading System
2017
Preferential trade agreement (PTA) members have to eliminate internal tariffs with each other but are allowed to discriminate against non-members. This can be in potential conflict with the WTO's overall non-discrimination clause. Using a competing exporters model of endogenous trade agreement formation, we study the central rules that govern PTAs. We find that the free trade agreements' (FTAs) requirement to eliminate internal tariffs increases total welfare when circumstances are such that global free trade is infeasible. However, it also reduces the likelihood of reaching global free trade. We also find that the MFN constraint does not just contribute to the achievement of global free trade but also delivers a welfare-superior outcome when global free trade is not possible. Finally, we show that the MFN constraint complements the PTA rules in achieving global free trade for only FTAs but not customs unions (CUs). However, when global free trade is infeasible, the MFN cons...