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What's the Point of Reciprocal Trade Negotiations? Exports, Imports, and Gains from Trade

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  • Paul Wonnacott
  • Ronald Wonnacott

Abstract

This paper explains why trade-policy makers may prefer reciprocal trade negotiations (RTN) to unilateral tariff reductions (UTR) for economic reasons. It answers puzzles like "Why WTO reciprocity?" and strengthens the unncecessarily weak case made for the WTO by those who downplay or dismiss benefits from foreign tariff reductions (FTR). RTN is superior to UTR because it provides economic benefits that UTR cannot -- namely, FTR benefits which are clearer than potentially important UTR benefits: Whereas each policy offers efficiency gains, any terms-of-trade effect of UTR generally detracts from these gains, while any terms-of-trade effect of FTR is typically beneficial (especially for a small price-taking country) with this benefit augmenting FTR's efficiency gains. Moreover, benefits from reductions in foreign barriers may come from several sources; they are not solely the result of terms-of-trade improvement -- or economies of scale (the two benefits already noted in the literature, though often dismissed). E.g. with foreign NTB elimination, possible home benefits are shown even with rising costs and terms-of-trade deterioration. RTN is also superior to UTR because, by eliminating protection in either NTB or tariff form, RTN provides an escape from not only a terms-of-trade prisoners' dilemma, but many other previously unrecognized prisoners' dilemmas, including one in international rent transfers, and several others with no economies-of-scale or terms-of-trade motivation. If reciprocity is an option, but only in a narrower CU or FTA form, such reciprocity may still be superior to UTR, or it may be inferior; theory cannot unambiguously rank these.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0419.pdf
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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0419.

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Length: 22 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:mdl:mdlpap:0419

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  1. Corden, W M, 1972. "Economies of Scale and Customs Union Theory," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 465-75, May-June.
  2. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. 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.
  4. Bagwell, Kyle & Staiger, Robert W, 1998. "Will Preferential Agreements Undermine the Multilateral Trading System?," Economic Journal, Royal Economic Society, vol. 108(449), pages 1162-82, July.
  5. Carlo Perroni & John Whalley, 1994. "The New Regionalism: Trade Liberalization or Insurance?," NBER Working Papers 4626, National Bureau of Economic Research, Inc.
  6. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
  7. Ethier, Wilfred J & Horn, Henrik, 1996. "Results-Oriented Trade Policy," Review of International Economics, Wiley Blackwell, vol. 4(1), pages 17-39, February.
  8. Krauss, Melvyn B, 1972. "Recent Developments in Customs Union Theory: An Interpretive Survey," Journal of Economic Literature, American Economic Association, vol. 10(2), pages 413-36, June.
  9. Krugman, Paul R, 1987. "Is Free Trade Passe?," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 131-44, Fall.
  10. Krishna, Pravin & Mitra, Devashish, 2005. "Reciprocated unilateralism in trade policy," Journal of International Economics, Elsevier, vol. 65(2), pages 461-487, March.
  11. Berglas, Eitan, 1979. "Preferential Trading Theory: The n Commodity Case," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 315-31, April.
  12. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-45, February.
  13. Wonnacott, Paul & Wonnacott, Ronald, 1981. "Is Unilateral Tariff Reduction Preferable to a Customs Union? The Curious Case of the Missing Foreign Tariffs," American Economic Review, American Economic Association, vol. 71(4), pages 704-14, September.
  14. Harry G. Johnson, 1965. "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, University of Chicago Press, vol. 73, pages 256.
  15. James R. Markusen & James R. Melvin, 1981. "Trade, Factor Prices, and the Gains from Trade with Increasing Returns to Scale," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 450-69, August.
  16. Jagdish Bhagwati (ed.), 2002. "Going Alone: The Case for Relaxed Reciprocity in Freeing Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025213, December.
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Cited by:
  1. Whalley, John, 2013. "Regional Agreements: A Stocktaking Based on WTO Notifications," Commissioned Papers 156228, Canadian Agricultural Trade Policy Research Network.

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