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A Political-Economy Theory of Trade Agreements

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  • Maggi, Giovanni
  • Rodriguez-Clare, Andres

Abstract

We develop a model where trade agreements - in addition to correcting terms-of-trade externalities - help governments to commit vis-a-vis domestic industrial lobbies. We explore how trade liberalization is affected by the characteristics of the political environment, such as the degree to which governments are politically motivated and the influence of lobbies during the negotiation of the agreement. We find that governments may prefer to commit to tariff ceilings, rather than exact tariff levels. We also find that trade liberalization is deeper when capital is more mobile across sectors. In a dynamic extension of the model, the optimal agreement entails an immediate slashing of tariffs followed by a phase of gradual trade liberalization. In the gradual phase, the speed of liberalization is higher when capital is more mobile.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5321.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5321

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Keywords: domestic commitment; lobbying; trade agreements;

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  1. Kyle Bagwell & Robert W. Staiger, 2005. "Enforcement, Private Political Pressure and the Gatt/Wto Escape Clause," Discussion Papers 0405-13, Columbia University, Department of Economics.
  2. Ben Zissimos, 2006. "The GATT and Gradualism," Vanderbilt University Department of Economics Working Papers 0619, Vanderbilt University Department of Economics.
  3. Bagwell, Kyle & Staiger, Robert W., 2001. "Reciprocity, non-discrimination and preferential agreements in the multilateral trading system," European Journal of Political Economy, Elsevier, vol. 17(2), pages 281-325, June.
  4. Grossman, Gene M & Helpman, Elhanan, 1995. "The Politics of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 85(4), pages 667-90, September.
  5. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
  6. Maggi, G & Rodriguez-Clare, A, 1996. "The Value of Trade Agreements in the Presence of Political Pressures," Papers 180, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Grossman, G.M. & Helpman, E., 1993. "Trade Wars and Trade Talks," Papers 1-93, Tel Aviv.
  8. Robert Staiger, 1994. "A Theory of Gradual Trade Liberalization," International Trade 9410003, EconWPA, revised 21 Oct 1994.
  9. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
  10. Paola Conconi & Carlo Perroni, 2003. "Self-Enforcing International Agreements and Domestic Policy Credibility," CESifo Working Paper Series 988, CESifo Group Munich.
  11. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  12. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
  13. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
  14. Furusawa, Taiji & Lai, Edwin L. -C., 1999. "Adjustment costs and gradual trade liberalization," Journal of International Economics, Elsevier, vol. 49(2), pages 333-361, December.
  15. Mitra, Devashish, 2002. "Endogenous political organization and the value of trade agreements," Journal of International Economics, Elsevier, vol. 57(2), pages 473-485, August.
  16. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-37, December.
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