Political Economy Trade Negotiations: An Empirical Game Theory Analysis

The paper questions why agricultural trade compromise between the USA and EC is so difficult, whether a compensatory scheme be found that is both politically feasible and resource saving, and whether liberalizing policies by selected OECD countries will ease a trade compromise. These questions are addressed in a political economy context since, if the influence of special interests is ignored, trade compromises that both save resources and are politically feasible are unlikely to be searched for or found. The analysis entails the estimation of political preference weights, game theory, and a partial equilibrium world trade model based on 1988 data. The general answers are: the most influential special-interest groups face economic losses that, when coupled with their influence, tend to prevent a broad-based trade compromise given the current set of policy instruments; partial trade liberalization can occur if instruments are decoupled from production incentives, but free trade does not result; and partial liberalization by the rest of the OECD greatly increases the feasibility for the USA and EC to compromise. These results illustrate that interdependence in world trade has reached the point where bilateral action alone is unlikely to lead to real liberalization.