Reciprocity in multilateral trade negotiations

Some countries have expressed concerns about imbalances in the level of tariffs applied by other countries. This leads to renewed interest in the way reciprocity is implemented in tariff negotiations and the aim of this paper is to compare different ways to implement reciprocity in tariff negotiations. We employ the WTO Global Trade Model to examine the potential impact of reciprocal tariffs introduced by the United States and to compare different ways to model reciprocity in multilateral tariff negotiations evaluating the economic effects on different negotiation partners. In particular, we look into different formulas to implement reciprocity: (i) the classical Bagwell-Staiger notion of reciprocity under which tariff changes provoke equal changes in exports and imports; (ii) reduction of tariffs to the lowest most-favoured nation (MFN) tariff rate; (iii) equal per cent reduction of tariffs; (iv) reduction in proportion to the share in global demand (both imported and domestic), such that larger players in the global market incurring larger terms of trade gains from having tariffs in place have to reduce tariffs more; (v) reduction of tariffs in proportion to the negative welfare impact (relative to GDP) of actual tariffs imposed on other countries. This approach formalizes the notion that large players imposing stronger negative terms of trade effects on other countries have to provide more concessions. The different formulas are implemented in a static and dynamic (with adjusting capital stock) setting.