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Conditional versus Unconditional Trade Concessions for Developing Countries

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  • Paola Conconi
  • Carlo Perroni

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 countrys 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 re- duced 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 ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/98541.

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Date of creation: 2012
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Publication status: Published in: Canadian journal of economics (2012) v.45,p.613-631
Handle: RePEc:ulb:ulbeco:2013/98541

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Keywords: Developing Countries; Commitment; Trade Concessions.;

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References

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  1. de Melo, Jaime & Grether, Jean-Marie & Olarreaga, Marcelo, 1999. "Who Determines Mexican Trade Policy?," CEPR Discussion Papers 2176, C.E.P.R. Discussion Papers.
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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. Richard Baldwin, 2011. "Unilateral tariff liberalisation," Global COE Hi-Stat Discussion Paper Series gd10-159, Institute of Economic Research, Hitotsubashi University.

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