Adjustment Costs and the Sequencing of Trade Liberalisation

A common feature of trade agreements between countries is that the integration of markets proceeds in stages. This paper examines conceptually the role played by adjustment costs in determining the best way to structure an agreement between two countries when there are multiple sectors to be liberalised. Adjustment costs to liberalisation of industries might influence the timing of liberalisation, with the analysis bearing similarity to why tariff reductions tend to be phased in over time. When two industries have no ‘spillover effects’, trade agreements with sequential liberalisation will be less costly to sustain. However, if the liberalisation of one industry influences permanently the flow of benefits from liberalising the other industry, simultaneous liberalisation may be easier to sustain.