Accession Rules and Trade Agreements: The Case of the WTO

This paper models the accession process to the World Trade Organization (WTO) as a two stage game. In the first stage, member countries choose tariff rates to be applied on trade with each other. In the second stage a non-member country applies for membership in the agreement and negotiates with the member countries over the tariff rates to be applied. Based on the rules of the WTO accession process, we model this negotiation using the Nash bargaining solution. The analysis focuses on the question of how the pattern of trade between the acceding country and the member countries affects the distribution of gains from accession between the members and the acceding countries, given the rules of the WTO negotiation process. We consider two n good, n country trade models which highlight features of the WTO tariff negotiations. The first is a model in which each country imports one good from all of the other countries (competing supplier model). This model highlights the role of the MFN principle, since member countries are forced to extend the same tariff treatment to non-members when they join. We show that the non-member will free ride on tariff reductions among the member countries in this case, and that the non-member will gain a larger fraction of the gains from accession if transport costs are sufficiently low. The second model considers a case in which each country exports a single good to the other countries (principal supplier model). We show that in this case tariff reductions by the member countries reduce the welfare of the non-member country, and the member countries gain a larger share of the gains from accession.