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Country size, trade liberalization and transfers

  • Kilolo, Jean-Marc Malambwe

In this paper, I develop a North-South pure exchange model to explain transfers between asymmetric countries. Two theories are investigated: firstly, I consider the theory of trade agreements; contrary to conventional wisdom, an efficient trade agreement (ETA) does not necessarily lead to free trade in the absence of internal political economy distortions. In fact, the ETA between asymmetric countries is such that the South sets a tariff higher than its Nash tariff and the North subsidizes its imports. When the difference in the endowment size is very large, the South's welfare gain is insufficient to compensate for the North's welfare loss. Interestingly enough, free trade always dominates the trade war equilibrium, regardless of countries' endowments. Secondly, I consider the theory of optimal tariffs and foreign aid. To encourage the South to liberalize trade, the North makes a transfer to the South - which increases with the countries' size asymmetry. To test this prediction, I use ACP-EU aid data and find that an increase in the recipient countries' relative size reduces foreign aid transfers. The present analysis provides a theoretical framework to understand the transition from the privileged market access to ACP-EU economic partnership agreements (EPAs) involving reciprocal trade concessions and the role of the adjustment transfers in this process.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47996.

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Date of creation: 2013
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Handle: RePEc:pra:mprapa:47996
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  1. Nuno Lim�o, 2007. "Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 821-855.
  2. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Stephan Klasen, 2010. "The Economic Benefits of Giving Aid in Terms of Donors` Exports," Ibero America Institute for Econ. Research (IAI) Discussion Papers 202, Ibero-America Institute for Economic Research.
  3. Vollmer, Sebastian & Martínez-Zarzoso, Inmaculada & Nowak-Lehmann D., Felicitas & Klann, Nils, 2009. "EU-ACP Economic Partnership Agreements - Empirical Evidence for Sub-Saharan Africa," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 39, Verein für Socialpolitik, Research Committee Development Economics.
  4. Klaus Desmet & Ignacio Ortuño-Ortín & Romain Wacziarg, 2011. "The Political Economy of Linguistic Cleavages," Vives discussion paper series 20, Katholieke Universiteit Leuven, Faculteit Economie en Bedrijfswetenschappen, Vives.
  5. Joseph Farrell and Eric Maskin., 1987. "Renegotiation in Repeated Games," Economics Working Papers 8759, University of California at Berkeley.
  6. Younas, Javed, 2008. "Motivation for bilateral aid allocation: Altruism or trade benefits," European Journal of Political Economy, Elsevier, vol. 24(3), pages 661-674, September.
  7. Head, Keith & Mayer, Thierry & Ries, John, 2008. "The Erosion of Colonial Trade Linkages After Independence," CEPR Discussion Papers 6951, C.E.P.R. Discussion Papers.
  8. Kyle Bagwell & Robert W. Staiger, 1997. "Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral Trading System," NBER Working Papers 5932, National Bureau of Economic Research, Inc.
  9. Park, Jee-Hyeong, 2000. "International trade agreements between countries of asymmetric size," Journal of International Economics, Elsevier, vol. 50(2), pages 473-495, April.
  10. Jean-François Arvis & Yann Duval & Ben Shepherd & Chorthip Utoktham, 2012. "Trade Costs in the Developing World:1995 – 2010," Working Papers 12112, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
  11. Limao, Nuno & Saggi, Kamal, 2006. "Tariff retaliation versus financial compensation in the enforcement of international trade agreements," Policy Research Working Paper Series 3873, The World Bank.
  12. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
  13. Simon Feeny & Mark McGillivray, 2008. "What Determines Bilateral Aid Allocations? Evidence From Time Series Data," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 515-529, 08.
  14. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
  15. 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.
  16. Nowak-Lehmann D., Felicitas & Martínez-Zarzoso, Inmaculada & Klasen, Stephan & Herzer, Dierk, 2008. "Aid and Trade from a Donor's Perspective," Proceedings of the German Development Economics Conference, Zurich 2008 27, Verein für Socialpolitik, Research Committee Development Economics.
  17. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "On the tying of aid to tariff reform," Journal of Development Economics, Elsevier, vol. 54(2), pages 479-491, December.
  18. Jean-Pierre Chauffour & Jean-Christophe Maur, 2011. "Preferential Trade Agreement Policies for Development : A Handbook," World Bank Publications, The World Bank, number 2329, December.
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