Trade Bargaining with Externalities, Imperfect Competition and Rules versus Power: Interpreting and Evaluating the Rules of the GATT/WTO

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Understanding trade negotiations from an economic perspective is not an easy task. Within a terms-of-trade driven Prisoner's dilemma framework, the fundamental international inefficiency that a trade agreement can solve relates to the cost-shifting that arises through terms-of-trade movements when governments protect import competing sectors unilaterally. By shifting some of the costs of this protection on to foreign exporters, each government over-protects its import competing sectors relative to what would be internationally efficient in light of its underlying preferences and the preferences of other governments. The result is that there is too little market access in the world in the absence of a trade agreement. From this perspective, the purpose of a trade agreement is to expand market access to efficient levels. In our proposed research, we focus on three distinct aspects of GATT/WTO bargaining: bilateral tariff bargaining in the presence of multiparty externalities; bargaining over tariffs while maintaining unilateral control over national competition policies; and the broader choice of a rules-based versus power-based negotiating forum.This characterization of the role of trade agreements is quite simple, yet it is also quite general, applying to a wide variety of political-economy settings. But even given this characterization, there is still the question of how trade negotiations might be structured most effectively. As it happens, the World Trade Organization (WTO) - and GATT, its predecessor organization created in 1947 - is not simply an agreement to implement a particular point on the efficiency frontier. Rather the GATT/WTO is a negotiating forum that is shaped by a set of rules, and subject to these rules member governments are then left to negotiate when, what and with whom they please. These rules may have important implications for the bargaining outcomes, and they may play important efficiency-enhancing roles. In our proposed research, we focus on three distinct aspects of GATT/WTO bargaining: bilateral tariff bargaining in the presence of multiparty externalities; bargaining over tariffs while maintaining unilateral control over national competition policies; and the broader choice of a rules-based versus power-based negotiating forum.