Size Inequality, Coordination Externalities and International Trade Agreements
AbstractDeveloping 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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Bibliographic InfoPaper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1115.
Date of creation: Sep 2011
Date of revision:
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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html
Developing countries; WTO; Trade; Tariffs; Reciprocity; Policy Coordination; Bonds; Transfers;
Other versions of this item:
- Nuno Limao & Kamal Saggi, 2011. "Size Inequality, Coordination Externalities and International Trade Agreements," NBER Working Papers 17603, National Bureau of Economic Research, Inc.
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- O24 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
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