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Reciprocity, non-discrimination and preferential agreements in the multilateral trading system

  • Bagwell, Kyle
  • Staiger, Robert W.

and non-discrimination, the two principles that are the pillars of the multi- lateral trading system as embodied in GATT and its successor, the WTO. We show that GATT's principle of reciprocity serves to neutralize the world-price effects of a country's trade policy decisions, and hence can deliver efficient trade-policy outcomes for its member governments provided that the externa- lities associated with trade intervention travel through world prices. We then establish that externalities indeed travel in this way if and only if tariffs also conform to the principle of non-discrimination (MFN). In this way, the principles of reciprocity and non-discrimination can work together to deliver efficient outcomes for the multilateral trading system. We also consider within our framework the implications of preferential agreements for the multilateral trading system. The introduction of free trade agreements com- plicates the way in which externalities are transmitted across countries, and in this environment the principle of reciprocity can not longer deliver efficient multilateral outcomes for its member governments. We do find a limited place for customs unions in the multilateral trading system, provided that the member countries of the union have similar political preferences. As these conditions are quite stringent, we offer little support for the hypothesis that the principle of reciprocity can deliver an efficient multi- lateral trade agreement in the presence of preferential agreements. Instead, our results offer support for the view that preferential agreements pose a threat to the existing multilateral system.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 17 (2001)
Issue (Month): 2 (June)
Pages: 281-325

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Handle: RePEc:eee:poleco:v:17:y:2001:i:2:p:281-325
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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  1. Kyle Bagwell & Robert W. Staiger, 1993. "Miltilateral Tariff Cooperation During the Formation of Customs Unions," Discussion Papers 1070, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Grossman, Gene M & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 675-708, August.
  3. Bond, E.W. & Syropoulos, C., 1993. "Trading Blocs and the Sustainability of Inte-regional Cooperation," Papers 5-93-3, Pennsylvania State - Department of Economics.
  4. Bagwell,K. & Staiger,R.W., 1998. "An economic theory of GATT," Working papers 15, Wisconsin Madison - Social Systems.
  5. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  6. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September.
  7. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," Discussion Papers 1150, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  9. Paul Krugman, 1991. "The move toward free trade zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-58.
  10. Kyle Bagwell & Robert W. Staiger, 1996. "Strategic Export Subsidies and Reciprocal Trade Agreements: The Natural Monopoly Case," Discussion Papers 1156, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  12. Maggi, G & Rodriguez-Clare, A, 1996. "The Value of Trade Agreements in the Presence of Political Pressures," Papers 180, Princeton, Woodrow Wilson School - Public and International Affairs.
  13. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  14. Robert C. Feenstra, 1995. "Estimating the Effects of Trade Policy," NBER Working Papers 5051, National Bureau of Economic Research, Inc.
  15. Steven Berry & James Levinsohn & Ariel Pakes, 1995. "Voluntary Export Restraints on Automobiles: Evaluating a Strategic TradePolicy," NBER Working Papers 5235, National Bureau of Economic Research, Inc.
  16. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  17. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  18. Robert W. Staiger, 1994. "International Rules and Institutions for Trade Policy," NBER Working Papers 4962, National Bureau of Economic Research, Inc.
  19. J. P. Neary (ed.), 1995. "International Trade," Books, Edward Elgar, volume 0, number 575, July.
  20. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
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