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Self-Enforcing Trade Agreements and Private Information

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  • Kyle Bagwell

Abstract

This paper considers self-enforcing trade agreements among privately informed governments. A trade agreement that uses weak bindings (i.e., maximal tariff levels) is shown to offer advantages relative to a trade agreement that uses strong bindings (i.e., precise tariff levels). Consistent with practice, the theory also predicts that governments sometimes apply tariffs that are strictly below their bound rates. When private information is persistent through time, an enforcement "ratchet effect" is identified: a government reveals that it is "weak," and thus that it is unlikely to retaliate in an effective manner, when it applies a low tariff. This effect suggests that a government with a low type may "pool" at an above-optimal tariff, in order to conceal weakness. It also suggests a new information-based theory of gradualism in trade agreements.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14812.

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Date of creation: Mar 2009
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Handle: RePEc:nbr:nberwo:14812
Note: ITI
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Find related papers by JEL classification:

  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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  1. Christian Broda & Nuno Limão & David Weinstein, 2006. "Optimal Tariffs: The Evidence," NBER Working Papers 12033, National Bureau of Economic Research, Inc.
  2. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
  3. Maggi, Giovanni & Rodriguez-Clare, Andres, 2005. "A Political-Economy Theory of Trade Agreements," CEPR Discussion Papers 5321, C.E.P.R. Discussion Papers.
  4. Susan Athey & Kyle Bagwell, 2004. "Collusion with persistent cost shocks," Discussion Papers 0405-07, Columbia University, Department of Economics.
  5. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  6. Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Bond, Eric W & Park, Jee-Hyeong, 2002. "Gradualism in Trade Agreements with Asymmetric Countries," Review of Economic Studies, Wiley Blackwell, vol. 69(2), pages 379-406, April.
  8. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  9. Mohamed Hedi Bchir & Sébastien Jean & David Laborde, 2006. "Binding Overhang and Tariff-Cutting Formulas," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(2), pages 207-232, July.
  10. Grossman, Gene M. & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Scholarly Articles 3450062, Harvard University Department of Economics.
  11. Alberto Martin & Wouter Vergote, 2005. "On the role of retaliation in trade agreements," Economics Working Papers 914, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  12. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
  13. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 317-349, 04.
  14. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  15. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  16. Michael Devereux, 1990. "Growth, Specialization, and Trade Liberalization," Working Papers 786, Queen's University, Department of Economics.
  17. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  18. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Ryerson University, Department of Economics.
  19. Bagwell, Kyle & Staiger, Robert W., 2001. "Reciprocity, non-discrimination and preferential agreements in the multilateral trading system," European Journal of Political Economy, Elsevier, vol. 17(2), pages 281-325, June.
  20. Kyle Bagwell & Robert W. Staiger, 2004. "The Economics of the World Trading System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524341, June.
  21. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. Lee, Gea M., 2007. "Trade agreements with domestic policies as disguised protection," Journal of International Economics, Elsevier, vol. 71(1), pages 241-259, March.
  23. Bagwell, Kyle & Sykes, Alan O., 2004. "Chile price band system and safeguard measures relating to certain agricultural products," World Trade Review, Cambridge University Press, vol. 3(03), pages 507-528, November.
  24. Aramendia Miguel & Ruiz Luis & Wen Quan, 2008. "Forgiving-Proof Equilibrium in Infinitely Repeated Games," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-17, February.
  25. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  26. Furusawa, Taiji & Lai, Edwin L. -C., 1999. "Adjustment costs and gradual trade liberalization," Journal of International Economics, Elsevier, vol. 49(2), pages 333-361, December.
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Cited by:

  1. Bacchetta, Marc & Piermartini, Roberta, 2011. "The value of bindings," WTO Staff Working Papers ERSD-2011-13, World Trade Organization (WTO), Economic Research and Statistics Division.
  2. Ornelas, Emanuel, 2012. "Preferential Trade Agreements and the Labor Market," CEPR Discussion Papers 8805, C.E.P.R. Discussion Papers.
  3. Robert W. Staiger & Alan O. Sykes, 2009. "International Trade and Domestic Regulation," NBER Working Papers 15541, National Bureau of Economic Research, Inc.
  4. Giovanni Maggi & Robert W. Staiger, 2009. "Breach, Remedies and Dispute Settlement in Trade Agreements," Cowles Foundation Discussion Papers 1735, Cowles Foundation for Research in Economics, Yale University.
  5. Ana Espinola-Arredondo & Felix Munoz-Garcia, . "When does Disinformation Promote Successful Treaties," Working Papers 2011-11, School of Economic Sciences, Washington State University.
  6. Gea Myoung Lee, 2011. "Optimal International Agreement and Treatment of Domestic Subsidy," Working Papers 01-2011, Singapore Management University, School of Economics.
  7. Manuel Amador & Kyle Bagwell, 2012. "Tariff Revenue and Tariff Caps," American Economic Review, American Economic Association, vol. 102(3), pages 459-65, May.

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