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Conditional versus Unconditional Trade Concessions for Developing Countries

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  • Conconi, Paola
  • Perroni, Carlo

Abstract

We consider a small open economy that faces a commitment problem in trade liberalization. We examine how the relationship with a large trading partner affects the ability of the small countrys government to sustain free trade through a reputational mechanism. If the small country's government is patient enough, it can overcome its domestic commitment without the help of the large country. Unconditional liberalization by the large trading partner has an ambiguous effect on the small country's dynamic incentives. Liberalization through a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, unambiguously dominates unconditional liberalization by the large country as a way of boosting trade reforms and reinforcing policy credibility in the small country. However, if capacity in the import-competing sector can only be reduced gradually, a conditional, reciprocal agreement may require an asynchronous exchange of concessions, with the large country liberalizing before the small country.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8253.

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Date of creation: Feb 2011
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Handle: RePEc:cpr:ceprdp:8253

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Keywords: Commitment; Conditionality; Developing Countries; Trade Concessions;

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  1. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1475-1506, November.
  2. Carlo Perroni & John Whalley, 1994. "The New Regionalism: Trade Liberalization or Insurance?," NBER Working Papers 4626, National Bureau of Economic Research, Inc.
  3. Horn, Henrik & Mavroidis, Petros C & Sapir, André, 2009. "Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements," CEPR Discussion Papers 7317, C.E.P.R. Discussion Papers.
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  7. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Ryerson University, Department of Economics.
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  10. Paola Conconi & Carlo Perroni, 2009. "Do Credible Domestic Institutions Promote Credible International Agreements?," ULB Institutional Repository 2013/98549, ULB -- Universite Libre de Bruxelles.
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  12. Coates, Daniel E. & Ludema, Rodney D., 2001. "A theory of trade policy leadership," Journal of Development Economics, Elsevier, vol. 65(1), pages 1-29, June.
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Cited by:
  1. Richard Baldwin, 2010. "Unilateral Tariff Liberalisation," NBER Working Papers 16600, National Bureau of Economic Research, Inc.
  2. Bernard Hoekman, 2013. "Re-Thinking Economic Development in the WTO," RSCAS Working Papers PP2013/09, European University Institute.

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