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Country size, trade liberalization and transfers

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  • Kilolo, Jean-Marc Malambwe

Abstract

In this paper, I develop a North-South pure exchange model to explain transfers between asymmetric countries. Two theories are investigated: firstly, I consider the theory of trade agreements; contrary to conventional wisdom, an efficient trade agreement (ETA) does not necessarily lead to free trade in the absence of internal political economy distortions. In fact, the ETA between asymmetric countries is such that the South sets a tariff higher than its Nash tariff and the North subsidizes its imports. When the difference in the endowment size is very large, the South's welfare gain is insufficient to compensate for the North's welfare loss. Interestingly enough, free trade always dominates the trade war equilibrium, regardless of countries' endowments. Secondly, I consider the theory of optimal tariffs and foreign aid. To encourage the South to liberalize trade, the North makes a transfer to the South - which increases with the countries' size asymmetry. To test this prediction, I use ACP-EU aid data and find that an increase in the recipient countries' relative size reduces foreign aid transfers. The present analysis provides a theoretical framework to understand the transition from the privileged market access to ACP-EU economic partnership agreements (EPAs) involving reciprocal trade concessions and the role of the adjustment transfers in this process.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47996.

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Date of creation: 2013
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Handle: RePEc:pra:mprapa:47996

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Keywords: asymmetry; foreign aid; transfers; tariffs; trade war.;

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  1. Jean-François Arvis & Yann Duval & Ben Shepherd & Chorthip Utoktham, 2012. "Trade Costs in the Developing World:1995 – 2010," Working Papers 12112, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
  2. Martínez-Zarzoso, Inmaculada & Nowak-Lehmann D., Felicitas & Klasen, Stephan, 2010. "The Economic Benefits of giving Aid in terms of Donors Exports," Proceedings of the German Development Economics Conference, Hannover 2010 28, Verein für Socialpolitik, Research Committee Development Economics.
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  14. Jean-Pierre Chauffour & Jean-Christophe Maur, 2011. "Preferential Trade Agreement Policies for Development : A Handbook," World Bank Publications, The World Bank, number 2329.
  15. Nuno Lim�o, 2007. "Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 821-855.
  16. Simon Feeny & Mark McGillivray, 2008. "What Determines Bilateral Aid Allocations? Evidence From Time Series Data," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 515-529, 08.
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  18. Vollmer, Sebastian & Martínez-Zarzoso, Inmaculada & Nowak-Lehmann D., Felicitas & Klann, Nils, 2009. "EU-ACP Economic Partnership Agreements - Empirical Evidence for Sub-Saharan Africa," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 39, Verein für Socialpolitik, Research Committee Development Economics.
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