The broadened scope of the GATT/WTO through successive rounds of trade liberalization is explained as a result of trade partner specificity and cross retaliation or linked punishments. In more recent years, however, countries have pursued trade liberalization through sector specific zero-for-zero agreements and preferential trade agreements, both of which have a reduced chance of suffering cross retaliation. This increase in unlinked agreements can be explained by the inclusion of imperfect observability into our model. If the dispute generating noise is perfectly correlated across sectors, however, then it provides no reason not to link agreements in a static sense and in many cases incremental (or successive round) linking can still generate more liberalization than static linking. It is only when the noise is imperfectly correlated that linking becomes problematic so that some sectors can enforce more liberalization in an unlinked agreement. As the correlation drops and/or the noise increases, static and incremental linking become increasingly burdensome. A further detriment to linking agreements is the number of sectors already covered. There is a natural limit to the number of linked agreements (that depends on the correlation between the noise terms) so that when facing a mature agreement that links many sectors, further liberalization will eventually be pursued through unlinked agreements.
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Paper provided by Florida International University, Department of Economics in its series Working Papers with number
0902.
Find related papers by JEL classification: F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations F15 - International Economics - - Trade - - - Economic Integration C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games F51 - International Economics - - International Relations and International Political Economy - - - International Conflicts; Negotiations; Sanctions F53 - International Economics - - International Relations and International Political Economy - - - International Agreements and Observance; International Organizations K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
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