Unilateral Trade Liberalization as Leadership in Trade Negotiations
AbstractThis 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 InfoPaper provided by EconWPA in its series International Trade with number 9802002.
Length: 41 pages
Date of creation: 02 Feb 1998
Date of revision:
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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Find related papers by JEL classification:
- F1 - International Economics - - Trade
- F2 - International Economics - - International Factor Movements and International Business
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