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Trade Agreements, Political Economy and Endogenously Incomplete Contracts

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  • Li, Na
  • Ker, Alan P.
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    Abstract

    We develop a political economy model of trade agreements following along the line of Grossman and Helpman (1995a) yet incorporating contracting costs, uncertainty and multiple policy instruments. We show that rent-seeking efforts do not affect tariff rates as they are offset by the substitution effect of domestic production subsidies. Similar to Horn et al (2010), we find the coexistence of uncertainty and contracting costs make optimal trade agreements incomplete contracts. Our model helps explain differential treatment on subsidies, countervailing duties, and the national treatment principle - all key provisions of the current WTO agreement.

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    File URL: http://purl.umn.edu/116850
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    Bibliographic Info

    Paper provided by Canadian Agricultural Trade Policy Research Network in its series Working Papers with number 116850.

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    Date of creation: Jun 2011
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    Handle: RePEc:ags:catpwp:116850

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    Related research

    Keywords: Trade agreement; political economy; contracting cost; uncertainty JEL Classification:; Agricultural and Food Policy; International Relations/Trade; Political Economy; Public Economics;

    This paper has been announced in the following NEP Reports:

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    1. Booth, Alison L, 1984. "A Public Choice Model of Trade Union Behaviour and Membership," Economic Journal, Royal Economic Society, vol. 94(376), pages 883-98, December.
    2. Horn, Henrik & Maggi, Giovanni & Staiger, Rikard W., 2007. "Trade Agreements as Endogenously Incomplete Contracts," Working Paper Series 689, Research Institute of Industrial Economics.
    3. Levy, Philip I., 1999. "Lobbying and international cooperation in tariff setting," Journal of International Economics, Elsevier, vol. 47(2), pages 345-370, April.
    4. Henrik Horn, 2006. "National Treatment in the GATT," American Economic Review, American Economic Association, vol. 96(1), pages 394-404, March.
    5. Kaempfer, William H & Lowenberg, Anton D, 1989. "The Theory of International Economic Sanctions--A Public Choice Approach: Reply," American Economic Review, American Economic Association, vol. 79(5), pages 1304-06, December.
    6. Schleich, Joachim & Orden, David, 1996. "Efficient choice among domestic and trade policies in the Grossman-Helpman Interest-Group Model," Bulletins 7458, University of Minnesota, Economic Development Center.
    7. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
    8. Mayer, Wolfgang & Riezman, Raymond G., 1987. "Endogenous choice of trade policy instruments," Journal of International Economics, Elsevier, vol. 23(3-4), pages 377-381, November.
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