Strategic Interaction among Nations: Negotiable and Non-negotiable Trade Barriers

Trade policy is modeled as a two-stage game between governments. Governments choose a negotiable trade barrier in the first stage of the game, which is cooperative. The level of this barrier is treated as a binding commitment in the second stage of the game where the non-negotiable trade barrier is chosen non-cooperatively. Hence governments choose trade barriers during negotiations with a view to influencing the equilibrium of the non-cooperative game to follow. This proves to be a convenient framework in which to analyze the idea that trade agreements contain loopholes which can be exploited by protectionist governments. Trade negotiations induce substitution toward less efficient instruments of protections, but are nevertheless welfare-improving as long as the negotiations are relevant (i.e., the negotiable barrier is actually in use), and the two instruments are not perfect substitutes.