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A note on bilateral trade agreements in the presence of irreversible investment and deferred negotiations

Author

Listed:
  • Matthew Cole

    (Florida International University)

  • M. Ryan Haley

    (University of Wisconsin - Oshkosh)

  • Aaron Lowen

    (Grand Valley State University)

Abstract

A common result in the trade literature is that a small country will realize gains from a bilateral free trade agreement with a large country. McLaren (1997) casts aspersions on this traditional belief by demonstrating that irreversible investment in the small country, with the possibility of re-negotiation by the large country, can actually make the small country prefer autarky to free trade. In this note, we identify a middle ground where the small country can realize above-autarky utility by only partially specializing (relative to the free-trade level of specialization) in export production this improvement occurs even in the presence of irreversible investment and deferred negotiations.

Suggested Citation

  • Matthew Cole & M. Ryan Haley & Aaron Lowen, 2008. "A note on bilateral trade agreements in the presence of irreversible investment and deferred negotiations," Economics Bulletin, AccessEcon, vol. 6(34), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-08f10018
    as

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    References listed on IDEAS

    as
    1. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    2. John Kennan & Raymond Riezman, 2013. "Do Big Countries Win Tariff Wars?," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 4, pages 45-51, World Scientific Publishing Co. Pte. Ltd..
    3. McLaren, John, 1997. "Size, Sunk Costs, and Judge Bowker's Objection to Free Trade," American Economic Review, American Economic Association, vol. 87(3), pages 400-420, June.
    4. Richard Chisik & Ronald B. Davies, 2004. "Gradualism In Tax Treaties With Irreversible Foreign Direct Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 113-139, February.
    5. Constantinos Syropoulos, 2002. "Optimum Tariffs and Retaliation Revisited: How Country Size Matters," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 707-727.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    irreversible investment;

    JEL classification:

    • F1 - International Economics - - Trade

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