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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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Bibliographic Info

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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References

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  1. John Whalley, 1996. "Why Do Countries Seek Regional Trade Agreements?," NBER Working Papers 5552, National Bureau of Economic Research, Inc.
  2. Richard E. Baldwin & Frederic Robert-Nicoud, 2002. "Entry and Asymmetric Lobbying: Why Governments Pick Losers," NBER Working Papers 8756, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bernard Hoekman, 2013. "Re-Thinking Economic Development in the WTO," RSCAS Working Papers PP2013/09, European University Institute.
  2. Baldwin, Richard, 2010. "Unilateral tariff liberalisation," CEPR Discussion Papers 8162, C.E.P.R. Discussion Papers.

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