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Reciprocity in free trade agreements

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  • Freund, Caroline

Abstract

The author uses detailed trade, tariff, and income data for countries involved in 91 trade agreements negotiated since 1980 to test for reciprocity in free trade agreements. The results offer strong evidence of reciprocity in North-North and South-South free trade agreements, but there is little empirical support for reciprocity in North-South trade agreements. In particular, after controlling for other determinants of trade preferences, the results suggest that a one percent increase in preferences offered leads to about a one-half of a percent increase in preferences received in North-North and South-South trade agreements. Freund also finds evidence that large countries extract greater trade concessions from small countries. This leads to a modified form of reciprocity in North-South agreements. A large increase in access to a developing country market leads to only a small increase in access to a rich country market. The results imply that there are incentives for countries to maintain protection in order to extract more concessions from trade partners. But in general, such perverse incentives should be less of a concern in developing countries involved in North-South agreements because the value of a developing country tariff preference in terms of its effect on trade preferences from a rich country is quite small. The gains from unilateral liberalization are likely to far outweigh potential gains from using protection as a bargaining chip in trade negotiations. The evidence is consistent with a repeated game model of trade liberalization. The model presented shows that trade preferences granted are increasing in trade preferences received. This implies that countries can extract greater concessions from trade agreement members if they have higher external trade barriers. However, if a country's trade barriers are very large then the gains from reneging on the agreement in the short run will be high, making the agreement unenforceable despite offering long-term gains. So, there is a reciprocity-credibility tradeoff. High tariffs may allow countries to extract more concessions from potential trade agreement partners, but they also make the country less credible in actually implementing agreed tariff concessions. If a country's external tariff is very high relative to other countries, then it will not be able to commit credibly to any free trade agreement.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3061.

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Date of creation: 31 May 2003
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Handle: RePEc:wbk:wbrwps:3061

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Keywords: Rules of Origin; Trade Policy; Common Carriers Industry; Economic Theory&Research; Environmental Economics&Policies; Trade and Regional Integration; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade Policy; Rules of Origin; Economic Theory&Research;

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  1. Lisandro Abrego & Carlo Perroni & John Whalley & Randall M. Wigle, 1997. "Trade and Environment: Bargaining Outcomes from Linked Negotiations," NBER Working Papers 6216, National Bureau of Economic Research, Inc.
  2. Carsten Kowalczyk & Donald Davis, 1996. "Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA," NBER Working Papers 5421, National Bureau of Economic Research, Inc.
  3. Bagwell,K. & Staiger,R.W., 2000. "GATT-think," Working papers 19, Wisconsin Madison - Social Systems.
  4. Finger, J. Michael & Reincke, Ulrich & Castro, Adriana, 1999. "Market access bargaining in the Uruguay Round - Rigid or relaxed reciprocity?," Policy Research Working Paper Series 2258, The World Bank.
  5. Carlo Perroni & John Whalley, 2000. "The new regionalism: trade liberalization or insurance?," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 1-24, February.
  6. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
  7. James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
  8. William Rogers, 1993. "Quantile regression standard errors," Stata Technical Bulletin, StataCorp LP, vol. 2(9).
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