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Do terms-of-trade effects matter for trade agreements? Evidence from WTO countries

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  • Ludema, Rodney D
  • Mayda, Anna Maria

Abstract

In the literature on the economics of international trade institutions, a key question is whether or not terms-of-trade effects drive international trade agreements. Recent empirical work addressing terms-of-trade effects has been restricted to non-WTO countries or accession countries, which differ markedly from existing WTO members and account for only a tiny fraction of world trade. This paper investigates whether MFN tariffs set by existing WTO members in the Uruguay round are consistent with the terms-of-trade hypothesis. We present a model of multilateral trade negotiations featuring free riding on MFN that leads the resulting tariff schedule to display terms-of-trade effects. Specifically, the model predicts that the level of the importer’s tariff resulting from negotiations should be negatively related to the product of exporter concentration, as measured by a Herfindahl-Hirschman index (sum of squared export shares), and the importer’s market power, as measured by the inverse elasticity of export supply, on a product-by-product basis. We test this hypothesis using data on tariffs, trade and production across more than 30 WTO countries and find strong support. We estimate that the internalization of terms of trade effects through WTO negotiations has lowered the average tariff of these countries by about 20% compared to its non-cooperative level.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7695.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7695

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Keywords: free riding; MFN clause; terms-of-trade effects;

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References

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  1. Andrew K. Rose, 2002. "Do We Really KNow that the WTO Increases Trade?," Working Papers 182002, Hong Kong Institute for Monetary Research.
  2. Grossman, G.M. & Helpman, E., 1993. "Trade Wars and Trade Talks," Papers 1-93, Tel Aviv.
  3. Horn, Henrik & Mavroidis, Petros C, 2001. "Economic and Legal Aspects of the Most Favoured Nation Clause," CEPR Discussion Papers 2859, C.E.P.R. Discussion Papers.
  4. Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR), 2005. "Do Countries Free Ride on MFN?," Working Papers gueconwpa~05-05-13, Georgetown University, Department of Economics.
  5. Bown, Chad P., 2004. "Trade disputes and the implementation of protection under the GATT: an empirical assessment," Journal of International Economics, Elsevier, vol. 62(2), pages 263-294, March.
  6. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
  7. Antoni Estevadeordal & Caroline Freund & Emanuel Ornelas, 2008. "Does regionalism affect trade liberalization towards non-members?," LSE Research Online Documents on Economics 19584, London School of Economics and Political Science, LSE Library.
  8. Rodney D. Ludema, 1991. "International Trade Bargaining And The Most-Favored-Nation Clause," Economics and Politics, Wiley Blackwell, vol. 3(1), pages 1-20, 03.
  9. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
  10. Saggi, Kamal, 2009. "The MFN clause, welfare, and multilateral cooperation between countries of unequal size," Journal of Development Economics, Elsevier, vol. 88(1), pages 132-143, January.
  11. Robert C. Feenstra, 1997. "U.S. Exports, 1972-1994: With State Exports and Other U.S. Data," NBER Working Papers 5990, National Bureau of Economic Research, Inc.
  12. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-65, December.
  13. Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank.
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Cited by:
  1. Barbara Dluhosch & Daniel Horgos, 2012. "(When) Does Tit-for-Tat Diplomacy in Trade Policy Pay Off?," FIW Working Paper series 085, FIW.
  2. Alfaro, Laura & Conconi, Paola & Fadinger, Harald & Newman, Andrew, 2010. "Trade Policy and Firm Boundaries," CEPR Discussion Papers 7899, C.E.P.R. Discussion Papers.

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