Political Economy, Uncertainty, and Contracting Costs: Agriculture and the Negotiation of Trade Agreements

Recent negotiations of the United States Mexico Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) highlight the impact of contracting costs, uncertainty, and the importance of political welfare. Agriculture exhibits these traits perhaps more than any other sector and subsequently tends to be pivotal in many trade negotiations. Moreover, these traits are -- to some extent -- responsible for the large increase in Regional Trade Agreements (RTAs). In this manuscript we extend the political economy model of trade agreements to include both contracting costs and uncertainty. Uncertainty is incorporated through trade and policy shocks while contracting costs are incorporated as a function of the number of policy instruments. The optimal conditions on domestic support differ considerably if governments maximize social surplus only versus some linear combination of both social surplus and private political welfare. We also show that the politically optimal structure of trade agreements allows for countervailing duties. Our model helps explain: (a) why tariffs rather than production subsidies are more common in agriculture; (b) differential treatment of agricultural producers in developed versus developing countries; (c) continued presence of agricultural subsidies in many RTAs even under significant trade volume growth; and (d) the trend toward harmonization of Sanitary and Phytosanitary Standards (SPS) measures.