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Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral Trading System

  • Kyle Bagwell
  • Robert W. Staiger

and non-discrimination, the two principles that are the pillars of the multi- lateral trading system as embodied in GATT and its successor, the WTO. We show that GATT's principle of reciprocity serves to neutralize the world-price effects of a country's trade policy decisions, and hence can deliver efficient trade-policy outcomes for its member governments provided that the externa- lities associated with trade intervention travel through world prices. We then establish that externalities indeed travel in this way if and only if tariffs also conform to the principle of non-discrimination (MFN). In this way, the principles of reciprocity and non-discrimination can work together to deliver efficient outcomes for the multilateral trading system. We also consider within our framework the implications of preferential agreements for the multilateral trading system. The introduction of free trade agreements com- plicates the way in which externalities are transmitted across countries, and in this environment the principle of reciprocity can not longer deliver efficient multilateral outcomes for its member governments. We do find a limited place for customs unions in the multilateral trading system, provided that the member countries of the union have similar political preferences. As these conditions are quite stringent, we offer little support for the hypothesis that the principle of reciprocity can deliver an efficient multi- lateral trade agreement in the presence of preferential agreements. Instead, our results offer support for the view that preferential agreements pose a threat to the existing multilateral system.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5932.

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Date of creation: Feb 1997
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Publication status: published as Bagwell, Kyle and Robert W. Staiger. "Reciprocity, Non-discrimination And The Preferential Agreements In The Multilateral Trading System," European Journal of Political Economy, 2001, v17(2,Jun), 281-325.
Handle: RePEc:nbr:nberwo:5932
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  1. Kyle Bagwell & Robert Staiger, 1994. "Multilateral Tariff Cooperation During the Formation of Customs Unions," International Trade 9410002, EconWPA.
  2. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," NBER Working Papers 5488, National Bureau of Economic Research, Inc.
  3. Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc.
  4. Kyle Bagwell & Robert W. Staiger, 1993. "Multilateral Tariff Cooperation During the Formation of Free Trade Areas," Discussion Papers 1048, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  6. Gene M. Grossman & Elhanan Helpman, 1993. "Trade Wars and Trade Talks," NBER Working Papers 4280, National Bureau of Economic Research, Inc.
  7. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  8. Robert W. Staiger, 1994. "International Rules and Institutions for Trade Policy," NBER Working Papers 4962, National Bureau of Economic Research, Inc.
  9. Bagwell,K. & Staiger,R.W., 1998. "An economic theory of GATT," Working papers 15, Wisconsin Madison - Social Systems.
  10. Bond, E.W. & Syropoulos, C., 1993. "Trading Blocs and the Sustainability of Inte-regional Cooperation," Papers 5-93-3, Pennsylvania State - Department of Economics.
  11. Paul Krugman, 1991. "The move toward free trade zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-58.
  12. Bagwell, Kyle & Staiger, Robert W., 1997. "Strategic export subsidies and reciprocal trade agreements: The natural monopoly case," Japan and the World Economy, Elsevier, vol. 9(4), pages 491-510, December.
  13. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  14. Feenstra, Robert C., 1995. "Estimating the effects of trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 30, pages 1553-1595 Elsevier.
  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. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
  17. Berry, S. & Linsohn, J. & Pakes, A., 1997. "Voluntary Export Restraints on Automobiles: Evaluating a Strategic Trade Policy," Working Papers 393, Research Seminar in International Economics, University of Michigan.
  18. J. P. Neary (ed.), 1995. "International Trade," Books, Edward Elgar, volume 0, number 575.
  19. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
  20. Giovanni Maggi & Andres Rodriguez-Clare, 1998. "The Value of Trade Agreements in the Presence of Political Pressures," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 574-601, June.
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