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What Are Trade Agreements For? -- Two Conflicting Stories Told by Economists, With a Lesson for Lawyers

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  • Donald H. Regan
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    Abstract

    Economists tell two stories about the function of trade agreements: trade agreements restrain protectionism, or trade agreements restrain the purposeful exploitation of market power, which I call 'terms-of-trade manipulation'. These stories are distinct, because protectionism and terms-of-trade manipulation are distinct, although they are often confused. Logically, trade agreements might restrain both protectionism and terms-of-trade manipulation, but no one holds this view. Protectionism theorists think terms-of-trade manipulation is rare in the real world; terms-of-trade theorists adopt a theoretical perspective in which they prove protectionism is globally efficient and should not be restrained. I analyse the two stories to dispel common conceptual confusions. I show that the protectionism story is superior, empirically and theoretically: countries do not exploit their market power, and the theoretical perspective of the terms-of-trade story is wrong if our concern is to interpret agreements. I reinterpret a theorem from the terms-of-trade story, and combine it with the fact that countries do not exploit market power, to demonstrate that national regulation that is domestically rational (except for not exploiting market power) is globally efficient and hence should not be restrained. This grounds a novel, efficiency-based argument against 'balancing' by dispute tribunals and in favour of substantial deference to non-protectionist regulation. Copyright 2006, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Journal of International Economic Law.

    Volume (Year): 9 (2006)
    Issue (Month): 4 (December)
    Pages: 951-988

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    Handle: RePEc:oup:jieclw:v:9:y:2006:i:4:p:951-988

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    Cited by:
    1. Simon Schropp, 2007. "Revisiting the "Compliance-vs.-Rebalancing" Debate in WTO Scholarship a Unified Research Agenda," IHEID Working Papers 29-2007, Economics Section, The Graduate Institute of International Studies, revised Dec 2007.
    2. Ralph Ossa, 2008. "A 'New Trade' Theory of GATT/WTO Negotiations," CEP Discussion Papers dp0877, Centre for Economic Performance, LSE.
    3. Monika Mrazova, 2009. "Trade negotiations when market access matters," Economics Series Working Papers 447, University of Oxford, Department of Economics.
    4. Wilfred J. Ethier, 2013. "The Trade Agreement Embarrassment, Second Version," PIER Working Paper Archive 13-049, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 02 Sep 2013.
    5. Robert W. Staiger & Alan O. Sykes, 2009. "International Trade and Domestic Regulation," NBER Working Papers 15541, National Bureau of Economic Research, Inc.

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