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The theory of trade policy and trade agreements: A critique

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  • Ethier, Wilfred J.

Abstract

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But it displays two puzzles that cast doubt on its practical relevance: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper examines the consistency of the implications of the Received Theory with actual trade policy. The basic conclusion is that the theory is inconsistent with reality. Furthermore, it is the role of terms-of-trade externalities — the central component of the Received Theory — that is the sole cause of this inconsistency.
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  • Ethier, Wilfred J., 2007. "The theory of trade policy and trade agreements: A critique," European Journal of Political Economy, Elsevier, vol. 23(3), pages 605-623, September.
  • Handle: RePEc:eee:poleco:v:23:y:2007:i:3:p:605-623
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    Cited by:

    1. Joseph Francois & Bernard Hoekman, 2010. "Services Trade and Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 642-692, September.
    2. Hoekman, Bernard, 2014. "The Bali Trade Facilitation Agreement and Rulemaking in the WTO: Milestone, Mistake or Mirage?," CEPR Discussion Papers 10212, C.E.P.R. Discussion Papers.
    3. Rotunno, Lorenzo, 2016. "Political stability and trade agreements: Evidence for ‘endgame FTAs’," European Journal of Political Economy, Elsevier, vol. 45(C), pages 133-148.
    4. David De Remer, 2013. "The Evolution of International Subsidy Rules," Working Papers ECARES ECARES 2013-45, ULB -- Universite Libre de Bruxelles.
    5. Gene M. Grossman, 2016. "The Purpose of Trade Agreements," NBER Working Papers 22070, National Bureau of Economic Research, Inc.
    6. Barbara Dluhosch & Daniel Horgos, 2013. "(When) Does Tit-for-tat Diplomacy in Trade Policy Pay Off?," The World Economy, Wiley Blackwell, vol. 36(2), pages 155-179, February.
    7. Sokolovska, Olena & Sokolovskyi, Dmytro, 2016. "Optimization of government trade behavior and its implication for small developing economy (the case of Ukraine)," MPRA Paper 71983, University Library of Munich, Germany.
    8. Matschke, Xenia, 2008. "Costly revenue-raising and the case for favoring import-competing industries," Journal of International Economics, Elsevier, vol. 74(1), pages 143-157, January.
    9. Rolf J. Langhammer, 2010. "Unordnung in der internationalen Handelsordnung: Befunde, Gründe, Auswirkungen und Therapien," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(1), pages 75-98, February.
    10. Manfred Elsig & Bernard M. Hoekman & Joost Pauwelyn, 2016. "Thinking about the performance of the World Trade Organization: A discussion across disciplines," RSCAS Working Papers 2016/13, European University Institute.
    11. Wilfred J. Ethier & Arye L. Hillman, 2017. "The Politics of International Trade," CESifo Working Paper Series 6456, CESifo Group Munich.
    12. Wolf-Heimo Grieben & Fuat Sener, 2009. "Labor Unions, Globalization, and Mercantilism," CESifo Working Paper Series 2889, CESifo Group Munich.
    13. Monika Mrazova, 2009. "Trade negotiations when market access matters," Economics Series Working Papers 447, University of Oxford, Department of Economics.
    14. Persson, Lars, 2012. "Environmental policy and lobbying in small open economies," Resource and Energy Economics, Elsevier, vol. 34(1), pages 24-35.
    15. Wilfred J. Ethier, 2013. "The Trade Agreement Embarrassment, Second Version," PIER Working Paper Archive 13-049, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 02 Sep 2013.
    16. Fredriksson, Per G. & Matschke, Xenia & Minier, Jenny, 2010. "Environmental policy in majoritarian systems," Journal of Environmental Economics and Management, Elsevier, vol. 59(2), pages 177-191, March.
    17. Wilfred J. Ethier, 2011. "The Political-Support View of Protection," PIER Working Paper Archive 11-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

    More about this item

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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