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Unilateral Trade Liberalization as Leadership in Trade Negotiations

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Author Info

  • Rodney D. Ludema

    (Georgetown University)

  • Daniel E. Coates

    (U.S. General Accounting Office)

Abstract

This paper constructs a model of bilateral trade negotiations in the presence of political risk to demonstrate that unilateral trade liberalization may be an optimal policy for a large country. The political risk takes the form of domestic opposition to trade agreements. Unilateral liberalization performs a risk-sharing function: when agreement implementation is blocked, the resulting tariffs are inefficient; a unilateral tariff reduction partially eliminates this inefficiency, but at a cost to the terms of trade of the liberalizing country. The quid pro quo comes in the form of more favorable terms for this country in any agreement that ends up being successful. The unilateral tariff reduction also diminishes the likelihood that a bilateral agreement is blocked, by reducing the incentive of domestic political interests to oppose it. We demonstrate the possibility of an inverse relationship between a country's monopoly power in trade and its optimal unilateral tariff.

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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 9802002.

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Length: 41 pages
Date of creation: 02 Feb 1998
Date of revision:
Handle: RePEc:wpa:wuwpit:9802002

Note: Type of Document - MS Word; prepared on IBM PC; to print on HP; pages: 41 ; figures: included. Thanks are due to Robert Baldwin, Jagdish Bhagwati, Robert Feenstra, Jonas Fisher, Andreas Hornstein, Robert Staiger, Ian Wooton, participants of the NBER Conference on International Trade Rules and Institutions, and participants of the 13th Annual Conference on International Trade, University of Western Ontario. Views expressed here do not reflect those of the U.S. General Accounting Office. All errors are ours alone.
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References

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  1. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  2. D. Fudenberg & David K. Levine, 1989. "Reputation and Equilibrium Selection in Games with a Patient Player," Levine's Working Paper Archive 508, David K. Levine.
  3. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June.
  4. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-91, October.
  5. repec:att:wimass:8912 is not listed on IDEAS
  6. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  7. Irwin, Douglas A, 1988. "Welfare Effects of British Free Trade: Debate and Evidence from the 1840s," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1142-64, December.
  8. McKeown, Timothy J., 1983. "Hegemonic stability theory and 19th century tariff levels in Europe," International Organization, Cambridge University Press, vol. 37(01), pages 73-91, December.
  9. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
  10. de Melo, Jaime & Montenegro, Claudio & Panagariya, Arvind, 1992. "Regional integration, old and new," Policy Research Working Paper Series 985, The World Bank.
  11. Magee,Stephen P. & Brock,William A. & Young,Leslie, 1989. "Black Hole Tariffs and Endogenous Policy Theory," Cambridge Books, Cambridge University Press, number 9780521362474, October.
  12. Yarbrough, Beth V & Yarbrough, Robert M, 1985. "Free Trade, Hegemony, and the Theory of Agency," Kyklos, Wiley Blackwell, vol. 38(3), pages 348-64.
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Cited by:
  1. Coates, Daniel E. & Ludema, Rodney D., 2001. "A theory of trade policy leadership," Journal of Development Economics, Elsevier, vol. 65(1), pages 1-29, June.
  2. Pravin Krishna & Devashish Mitra, 2003. "Reciprocated Unilateralism in Trade Policy: An Interest-Group Approach," NBER Working Papers 9631, National Bureau of Economic Research, Inc.

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