This paper proposes a theory of gradual trade liberalization. I consider countries that are limited to self-enforcing arrangements in their trade relations. I argue that enforcement problems associated with the maintenance of low cooperative tariffs are exacerbated by the presence of resources in the import-competing sector that are (or potentially could be) earning rents from their sector-specific skills. Intuitively, by being able to transform into rents a portion of what otherwise would be dead weight loss under a tariff hike, the presence of such resources makes deviation from a low cooperative tariff to a high tariff more desirable for the deviating country, and makes punishments under reciprocally high tariffs less painful. Hence, the presence of rent-collecting resources in an import-competing sector acts as a deterrent to trade liberalization. But if an initial 'round' of liberalization can induce at least a portion of these resources in the import-competing sector to relocate to the rest of the economy, and if by not using their sector-specific skills these resources stand to lose them, then the enforcement issues associated with their presence will also diminish over time, and further rounds of liberalization are made possible by the effects of the initial round. I formalize this gradual process of trade liberalization, and explore the consequences of a failed round of liberalization for the ability to maintain current levels of cooperation.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4620.
Length: Date of creation: Jan 1994 Date of revision: Publication status: published as With Kyle Bagwell, published as "A Theory of Managed Trade", American Economic Review, Vol. 80, no. 4 (1990): 779-795. A. Deardorff, J. Levinsohn and R. Stern, eds. New Directions in Trade Theory, University of Michigan Press, 1995. Handle: RePEc:nbr:nberwo:4620
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Find related papers by JEL classification: F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Bagwell, Kyle & Staiger, Robert W, 1990.
"A Theory of Managed Trade,"
American Economic Review,
American Economic Association, vol. 80(4), pages 779-95, September.
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Kyle Bagwell & Robert W. Staiger, 1989.
"A Theory of Managed Trade,"
Discussion Papers
801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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