Endogenous political organization and the value of trade agreements

In a bargaining model of endogenous protection, I introduce fixed costs of political-organization that need to be incurred by capitalists prior to actual lobbying. Unlike Maggi and Rodriguez-Clare [J. Pol. Econ. 106(3) (1998) 575] intersectoral capital mobility is disallowed. Nevertheless, I am still able to obtain their main result that a government with low bargaining power vis-à-vis the import-competing lobby precommits to a free-trade agreement. Further, with high fixed organizational costs, the government prefers to stay out of such agreements. Its maximum bargaining power consistent with signing a trade agreement has an inverse-V-shaped relationship with respect to the size of fixed costs.     

Increasing returns, multinationals and geography of preferential trade agreements

This paper uses a model of horizontal multinational enterprises to explore the relationship between transportation costs and trade policy cooperation. Tariffs have the effect of attracting foreign direct investment to the benefit of consumers in the host country. As transport costs fall, the incentive to impose tariffs falls and the benefits to cooperation rise. Thus, in a repeated game in which cooperation is limited by a self-enforcement constraint, a reduction in transport costs facilitates free trade. This logic is applied to a three-country model to examine preferential trade agreements. It is found that if any country is too distant from the others, then global free trade is not attainable. Rather, if two of the countries are within a critical distance of each other and distant from the third country, then the unique outcome is an exclusive free trade agreement between the two adjacent countries. Thus, the model predicts a strong regional bias in preferential trade agreements.     

Do free trade agreements actually increase members' international trade?

For over 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and — in particular — the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not an exogenous variable. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable's endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members' bilateral trade after 10 years.     

Economic determinants of free trade agreements

The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements (FTAs) and of the likelihood of FTAs between pairs of countries using a qualitative choice model. We develop this econometric model based upon a general equilibrium model of world trade with two factors of production, two monopolistically-competitive product markets, and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents. The empirical model correctly predicts, based solely upon economic characteristics, 85% of the 286 FTAs existing in 1996 among 1431 pairs of countries and 97% of the remaining 1145 pairs with no FTAs.     

International trade agreements between countries of asymmetric size

This paper analyzes how changes in the structure and environment of trade agreements between a small and a large country affect the efficient frontier of those self-enforcing agreements and hence, negotiation outcomes. Using the autarky punishment instead of the interior Nash punishment may provide the small country with greater bargaining power. Negotiating direct transfers under free trade instead of reciprocal tariff reductions improves the worst possible negotiation outcome for the small country. The existence of irreversible investment may strengthen (weaken) the small country’s bargaining power under the interior Nash (autarky) punishment scheme.     

On the size and number of preferential trading arrangements

This paper uses a multi-country political economy model to investigate the possibility of achieving global free trade through the expansion of Preferential Trading Arrangements (PTAs). It is shown that bloc expansion would result in global free trade if blocs have an open membership. However, that would not be the case if membership were selective: at some point, the members of the bloc would stop accepting new members and this would lead to the creation of a second bloc. The likelihood of such a second bloc would make the members of the first bloc choose a larger bloc size than they would have chosen if only one bloc was allowed to form.     

Recurrent trade agreements and the value of external enforcement

This paper presents a theory of dynamic trade agreements in which external institutions, such as the WTO, play a central role in supporting credible enforcement. In our model, countries engage in ongoing negotiations, and, as a consequence, cooperative agreements become unsustainable in the absence of external enforcement institutions. By using mechanisms such as delays in dispute resolution and direct penalties, enforcement institutions can restore incentives for cooperation, despite the lack of coercive power. The occurrence of costly trade disputes, and the feasibility of mechanisms such as escape clauses, depend on the degree to which enforcement institutions can verify, and condition on, events that may lead to trade disputes.     

Multilateral trade negotiations, bilateral opportunism and the rules of GATT/WTO

Trade negotiations occur through time and between the governments of many countries. An important issue is thus whether the value of concessions that a government wins in a current negotiation may be eroded in a future bilateral negotiation to which it is not party. We identify rules of negotiation that serve to protect the welfare of governments that are not participating in the bilateral negotiation. Our main finding is that the two central principles of GATT/WTO—nondiscrimination (MFN) and reciprocity—preserve the welfare of nonparticipating governments and therefore offer a “first-line of defense” against bilateral opportunism.     

A strategic and welfare theoretic analysis of free trade areas

We construct a three-country model to determine how the formation of free trade areas (FTAs) affects optimal tariffs and welfare. We find that, at constant rest of the world (ROW) tariffs, the adoption of internal free trade induces union members to reduce their external tariffs below the Kemp-Wan [J. Int. Econom. 6 (1976) 95-97] level, and causes ROW's terms of trade to improve and its welfare to rise. When ROW also behaves optimally, its policy response to the formation of the FTA is to raise tariffs. Generally, FTA members prefer to liberalize internal trade partially and find regional integration appealing only if their collective size is sufficiently large. We also demonstrate how FTAs may undermine the attainment of global free trade.     

On necessarily welfare-enhancing free trade areas

The well-known Kemp-Vanek-Ohyama-Wan proposition establishes that if two or more countries form a customs union (CU) by freezing their net external trade vector through a common external tariff and eliminating internal trade barriers, the union as a whole and the rest of the world cannot be worse off than before. Owing to the fact that a Free Trade Area (whose member countries impose country specific external tariff vectors) does not equalize marginal rates of substitution across its member countries (in contrast to a CU), the literature has been unable to provide a parallel demonstration regarding welfare improving Free Trade Areas (FTAs). The present paper eliminates this gap. In extending the result to the case with intermediate inputs, the paper also sheds new light on the rules of origin required to support such necessarily welfare enhancing FTAs. We show here that provided no trade deflection is permitted, all that is required by way of rules of origin is that the goods produced within the union - whether final or intermediate - be allowed to be traded freely. The proportion of domestic value added in final goods does not enter as a criterion in the rules of origin.     

Trade-diverting free trade agreements,external tariffs,and feasibility

There has been a proliferation of preferential trade agreements within the last two decades. This paper analyzes the effects of free trade agreements (FTAs) on external tariffs in small economies where protection decisions are made politically. Our model determines tariff rates endogenously instead of assuming they are fixed during or after the formation of FTAs as commonly done in the literature. We show that when an FTA is established, the tariff rates that apply to non-members essentially decline. More importantly, we investigate the interaction between endogenous tariff determination and the feasibility of an FTA. We find that the expectation of tariff reductions under endogenous tariffs could make an otherwise feasible FTA if tariffs were fixed become infeasible. However, if domestic import-competing sectors are relatively smaller and the government places a significant weight on political contributions relative to social welfare, an FTA with endogenous tariffs may be more likely to be feasible than an FTA assumed to fix external tariffs.     

Free trade agreements in a small,open country: The case of Norway

Negotiating free trade agreements (FTAs) has been a high political priority for Norway. Today, it has agreements with 41 countries outside the European Union (EU)/the European Free Trade Association (EFTA), resulting in one of the world's most extensive FTA networks. FTAs cover about 10% of Norway's trade—a share likely to increase in the future. These agreements eliminate tariffs on a substantial number of traded products and have gradually become more comprehensive, covering an expanding range of non‐tariff areas. Hence, they may have trade‐promoting effects beyond tariff reductions as such. On the other hand, the non‐tariff provisions often do not go further than what has already been dealt with in other international agreements or practised domestically, so their overall effect may be limited.     

Gradualism in free trade agreements: a theoretical justification

A notable feature of many recent trade agreements is the gradual, rather than immediate, reduction of trade barriers. In this paper we model trade liberalization as a cooperative relationship that evolves gradually in a non-cooperative environment. We show that specialization, capacity irreversibility and the development of trade-partner specific capital increase the benefit of continuing the liberalizing relationship and decrease, over time, the lowest obtainable self-enforcing tariff. By increasing the penalty of future defection, sunk costs ensure that the self-enforcing trading relationship starts slowly, but once in progress the level of cooperation continues to improve.     

Trade liberalization,free trade agreements,and the value of firms: Stock market evidence from Singapore

We examine the effects of the United States–Singapore Free Trade Agreement (FTA) on the value of firms listed in the Singapore Exchange using event study analysis. Despite the predictability of the FTA negotiations, we find that one event – the removal of the last obstacle to the free trade deal in January 2003 – increases the value of firms in some industries by 1–11% on average. These results indicate that trade liberalization and FTAs do increase the value of firms.     

Kick‐starting diffusion: Explaining the varying frequency of preferential trade agreements’ environmental provisions by their initial conditions

Most recent preferential trade agreements (PTAs) include environmental provisions. While a number of these environmental provisions remain rare and are incorporated in just a few PTAs, others are widely popular and are duplicated in more than 100 PTAs. We still lack a convincing explanation for this varying frequency. While the diffusion literature typically tries to explain how diffusion occurs, we investigate why certain provisions diffuse more often than others. We hypothesise that the initial conditions under which provisions first emerge determine the scope of their diffusion. Our results support this hypothesis and indicate that provisions originating from intercontinental agreements diffuse more often than others. At the same time, provisions first designed by economically powerful or environmentally credible countries are not related to more frequent occurrences of diffusion. These findings are of interest for the literatures on international institutions' design, interaction and diffusion.     

The trade structure effects of endogenous regional trade agreements

This paper formulates an empirical model to estimate the impact of endogenous new regional trade agreement (RTA) membership on trade structure. The likelihood of new RTA membership is influenced by economic fundamentals such as country size, factor endowments, and trade and investment costs. In a sample of country-pairs covering mainly the OECD economies we find a particularly strong effect of endogenous RTAs on intra-industry trade in a difference-in-difference analysis based on matching techniques. The associated trade volume effects are similar to the ones found in previous research on the effects of endogenous RTAs. Overall, this indicates that RTA membership might reduce inter-industry trade not only in relative but also in absolute terms and that the trade volume effect is due to the associated growth in trade within industries.     

Discriminatory tariffs and international negotiations

Recent research has highlighted the efficiency of the MFN principle within the GATT/WTO structure. This paper analyzes the exception made to MFN within Article XXIII that allows discriminatory punishment for deviations from the agreement. We argue that, in the absence of collusion, the MFN exception reduces the severity of punishment and thus lowers the level of cooperation that can be achieved by the agreement. However, discriminatory punishment may still be beneficial as we show that it reduces the problems associated with the potential for renegotiation during the punishment phase. Finally, we argue that our results are also applicable to the question of whether to use trade policy sanctions as a means of enforcing agreements covering domestic policies.     

Subcontracting bargaining power and the trade policy

In this paper, we consider that the split of surplus from a subcontracting deal depends on the relative bargaining powers of domestic and foreign firms. The finding shows that a domestic optimal export policy is a tax (subsidy) if the bargaining power of the domestic firm is sufficiently small (large). We also demonstrate that a domestic firm’s higher bargaining power increases (may decrease) domestic profit if the export policy is exogenous (endogenous). In the presence of an outsider option, the domestic optimal export policy will be threatened by the outsider option if the domestic firm’s bargaining power is sufficiently small, and thus a large bargaining power increases the optimal export tax. At the same time, the foreign firm may still subcontract to the domestic firm even if the domestic firm has a higher total marginal cost of the intermediate good than the outsider option.     

Negotiating a Stable Government: An Application of Bargaining Theory to a Coalition Formation Model

In this paper, we apply bargaining theory to a certain model of coalition formation. The notions of a feasible government and a stable government are central in the model considered. By a government, we mean a pair consisting of a majority coalition and a policy supported by this coalition. The aim of this paper is to establish which stable government should be created if more than one stable government exists or, in case there is no stable one, which feasible government should be formed if more than one feasible government exists. Several bargaining procedures leading to the choice of one stable (or feasible) government are proposed. We define bargaining games in which only parties belonging to at least one stable (or feasible) government bargain over the creation of a government. We consider different bargaining costs. We investigate subgame perfect equilibria of the bargaining games defined. It turns out that the prospects of a party depend on the procedure applied, and on the bargaining costs assumed. We also apply the coalition formation model to the Polish Parliament after the 2001 elections and apply the different bargaining games for the creation of a government to this example.     

欧盟贸易协定谈判机制研究

国际协定是欧盟法律体系的重要组成部分。与贸易有关的国际协定,包括贸易协定、合作协定以及联系协定等,也是欧盟贸易政策的重要组成部分。本文通过介绍欧盟贸易协定谈判权的法理依据、各参与主体的法律地位和作用、参与主体内部及之间的权力平衡关系,分析和研究了欧盟贸易协定谈判机制,以利于进一步了解欧盟法律和贸易政策,也有益于发展中欧贸易关系。