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An Economic Theory of the GATT: A Generalization



Bagwell and Staiger (1999) conclude that the reason for governments to enter trade negotiation is the terms-of-trade externality, which creates an inefficiency in unilateral trade policies. To address this conclusion, the authors consider that protection may be motivated by many other objectives than just unilateral attempts at terns-of-trade improvements, including the desire to: (1) increase incomes (or prevent trade-driven losses) in import- competing countries; (2) increase employment; (3) improve the balance of trade. It may or may not be sensible for countries to increase tariffs for any of these reasons, but they do. In each case, trade agreements may be appealing to governments as a way to prevent an inefficiency that arises from unilateral trade policies. The justification for the GATT is that it restrains unilateral protection, regardless of its political or economic motivation. Moreover, this conclusion holds even if each country has a different motive for protection.

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  • Paul Wonnacott & Ronald J. Wonnacott, 1999. "An Economic Theory of the GATT: A Generalization," UWO Department of Economics Working Papers 9909, University of Western Ontario, Department of Economics.
  • Handle: RePEc:uwo:uwowop:9909

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    1. Harry G. Johnson, 1953. "Optimum Tariffs and Retaliation," Review of Economic Studies, Oxford University Press, vol. 21(2), pages 142-153.
    2. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
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