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Size Inequality, Coordination Externalities and International Trade Agreements

  • Nuno Limao
  • Kamal Saggi

Developing countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation. such as the WTO. but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it Includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17603.

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Date of creation: Nov 2011
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Publication status: published as Limão, Nuno & Saggi, Kamal, 2013. "Size inequality, coordination externalities and international trade agreements," European Economic Review, Elsevier, vol. 63(C), pages 10-27.
Handle: RePEc:nbr:nberwo:17603
Note: ITI
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  2. Ludema, Rodney D & Mayda, Anna Maria, 2005. "Do Countries Free Ride on MFN?," CEPR Discussion Papers 5160, C.E.P.R. Discussion Papers.
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  14. Robert Z. Lawrence, 2003. "Crimes and Punishments?: Retaliation under the WTO," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 372, December.
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  18. Schott Jeffrey J, 2009. "America, Europe, and the New Trade Order," Business and Politics, De Gruyter, vol. 11(3), pages 1-24, November.
  19. Saggi, Kamal & Yildiz, Halis Murat, 2009. "Bilateralism, multilateralism, and the quest for global free trade," MPRA Paper 17558, University Library of Munich, Germany.
  20. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
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