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Conditional versus unconditional trade concessions for developing countries

  • Paola Conconi
  • Carlo Perroni

We examine how trade liberalization by a large trading partner affects the ability of a small country's government to sustain free trade through a reputational mechanism. Unconditional liberalization by the large trading partner has an ambiguous effect on the small country's dynamic incentives. Liberalization through a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, unambiguously dominates unconditional liberalization by the large country as a way of boosting trade reforms and reinforcing policy credibility in the small country. However, if capacity in the import-competing sector can be reduced only gradually, a conditional, reciprocal agreement may require an asynchronous exchange of concessions, where the large country liberalizes before the small country does.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 45 (2012)
Issue (Month): 2 (May)
Pages: 613-631

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Handle: RePEc:cje:issued:v:45:y:2012:i:2:p:613-631
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