Second-Best Linkages and the Gains from Global Reform of Manufactures Trade

The Uruguay Round's built-in agenda for future WTO negotiations omitted further liberalization in manufactures, yet this paper shows that there are large potential gains to be had from such tariff cuts, especially in the developing countries. In order to fully estimate the benefits of adding industrial products to a future multilateral trade round, we need to take into account the levels of protection in other sectors—most notably agriculture and services—in which many trade flows are highly distorted. This paper examines the nature of the second-best linkages among sectors using a balance-of-trade function approach. The importance of these linkages is evaluated using a numerical general equilibrium model. It is found that, in most cases, the second-best spillovers do not greatly affect the results, implying that the estimated gains from manufacturing reforms will be largely independent of their sequencing. However, in a few regions, most notably the EU, the second-best effects play a significant role.