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Size Inequality, Coordination Externalities and International Trade Agreements

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Author Info

  • Kamal Saggi

    () (Department of Economics, Vanderbilt University)

  • Nuno Limao

    () (Department of Economics, University of Maryland, NBER and CEPR)

Abstract

Developing countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation---such as the WTO---but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w15.pdf
File Function: First version, September 2011
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1115.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1115

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Developing countries; WTO; Trade; Tariffs; Reciprocity; Policy Coordination; Bonds; Transfers;

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References

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  1. Ludema, Rodney D., 2001. "Optimal international trade agreements and dispute settlement procedures," European Journal of Political Economy, Elsevier, vol. 17(2), pages 355-376, June.
  2. Limão, Nuno & Saggi, Kamal, 2006. "Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements," CEPR Discussion Papers 5560, C.E.P.R. Discussion Papers.
  3. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, 02.
  4. Ludema, Rodney D & Mayda, Anna Maria, 2005. "Do Countries Free Ride on MFN?," CEPR Discussion Papers 5160, C.E.P.R. Discussion Papers.
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Cited by:
  1. Paolo E. Giordani & Nadia Rocha & Michele Ruta, 2012. "Food Prices and the Multiplier Effect of Export Policy," Working Papers LuissLab 1297, Dipartimento di Economia e Finanza, LUISS Guido Carli.

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