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What's the Point of Reciprocal Trade Negotiations? Exports, Imports, and Gains from Trade

  • Paul Wonnacott
  • Ronald Wonnacott

This paper explains why trade-policy makers may prefer reciprocal trade negotiations (RTN) to unilateral tariff reductions (UTR) for economic reasons. It answers puzzles like "Why WTO reciprocity?" and strengthens the unncecessarily weak case made for the WTO by those who downplay or dismiss benefits from foreign tariff reductions (FTR). RTN is superior to UTR because it provides economic benefits that UTR cannot -- namely, FTR benefits which are clearer than potentially important UTR benefits: Whereas each policy offers efficiency gains, any terms-of-trade effect of UTR generally detracts from these gains, while any terms-of-trade effect of FTR is typically beneficial (especially for a small price-taking country) with this benefit augmenting FTR's efficiency gains. Moreover, benefits from reductions in foreign barriers may come from several sources; they are not solely the result of terms-of-trade improvement -- or economies of scale (the two benefits already noted in the literature, though often dismissed). E.g. with foreign NTB elimination, possible home benefits are shown even with rising costs and terms-of-trade deterioration. RTN is also superior to UTR because, by eliminating protection in either NTB or tariff form, RTN provides an escape from not only a terms-of-trade prisoners' dilemma, but many other previously unrecognized prisoners' dilemmas, including one in international rent transfers, and several others with no economies-of-scale or terms-of-trade motivation. If reciprocity is an option, but only in a narrower CU or FTA form, such reciprocity may still be superior to UTR, or it may be inferior; theory cannot unambiguously rank these.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0419.pdf
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Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0419.

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Length: 22 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:mdl:mdlpap:0419
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  1. James R. Markusen & James R. Melvin, 1981. "Trade, Factor Prices, and the Gains from Trade with Increasing Returns to Scale," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 450-69, August.
  2. Harry G. Johnson, 1965. "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, University of Chicago Press, vol. 73, pages 256.
  3. David Cox & Richard Harris, 1983. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Working Papers 523, Queen's University, Department of Economics.
  4. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  5. Ethier, W.J. & Horn, H., 1993. "Results-Oriented Trade Policy," ISER Discussion Paper 0304, Institute of Social and Economic Research, Osaka University.
  6. Krishna, Pravin & Mitra, Devashish, 2005. "Reciprocated unilateralism in trade policy," Journal of International Economics, Elsevier, vol. 65(2), pages 461-487, March.
  7. Berglas, Eitan, 1979. "Preferential Trading Theory: The n Commodity Case," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 315-31, April.
  8. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
  9. Carlo Perroni & John Whalley, 2000. "The new regionalism: trade liberalization or insurance?," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 1-24, February.
  10. Jagdish Bhagwati (ed.), 2002. "Going Alone: The Case for Relaxed Reciprocity in Freeing Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025213, June.
  11. Wonnacott, Paul & Wonnacott, Ronald, 1981. "Is Unilateral Tariff Reduction Preferable to a Customs Union? The Curious Case of the Missing Foreign Tariffs," American Economic Review, American Economic Association, vol. 71(4), pages 704-14, September.
  12. Krugman, Paul R, 1987. "Is Free Trade Passe?," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 131-44, Fall.
  13. Krauss, Melvyn B, 1972. "Recent Developments in Customs Union Theory: An Interpretive Survey," Journal of Economic Literature, American Economic Association, vol. 10(2), pages 413-36, June.
  14. Bagwell, Kyle & Staiger, Robert W, 1998. "Will Preferential Agreements Undermine the Multilateral Trading System?," Economic Journal, Royal Economic Society, vol. 108(449), pages 1162-82, July.
  15. Corden, W M, 1972. "Economies of Scale and Customs Union Theory," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 465-75, May-June.
  16. Coates, Daniel E. & Ludema, Rodney D., 2001. "A theory of trade policy leadership," Journal of Development Economics, Elsevier, vol. 65(1), pages 1-29, June.
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