A 'New Trade' Theory of GATT/WTO Negotiations

Abstract

I suggest a novel theory of GATT/WTO negotiations based on Krugman's "new trade" model. It emphasizes international production relocations and is easy to calibrate to bilateral trade data. Focusing on the major players in recent GATT/WTO negotiations, I find that it implies reasonable noncooperative tariffs as well as moderate gains from GATT/WTO negotiations. A "New Trade" Theory of GATT/WTO Negotiations Ralph Ossa University of Chicago and National Bureau of Economic ResearchI suggest a novel theory of GATT/WTO negotiations based on Krugman's "new trade" model. It emphasizes international production relocations and is easy to calibrate to bilateral trade data. Focusing on the major players in recent GATT/WTO negotiations, I find that it implies reasonable noncooperative tariffs as well as moderate gains from GATT/WTO negotiations.

Preferential Trade Agreements Harm Third Countries

“…This result is in line with that obtained in standard neoclassical trade models, e.g. Maggi and Rodriguez‐Clare (), and other new trade models in the presence of a freely traded homogeneous good, see the trade policy implications derived by Puga and Venables (), as well as the model by Ossa () where the third country trades with one partner country only. However, in general, when trade is not restricted so that each country trades with any other, a PTA may hurt a partner country in terms of welfare under FPE.…”

“…In this article, we address the consequences of market liberalisation in a framework dealing with size, neighbouring, price and integration effects. For this purpose, following Venables () and Ossa (), among others, we build on Krugman's () new trade theory to construct a three‐country model of international trade under monopolistic competition. In contrast to the existing literature, we relax the assumption of FPE by removing the costlessly traded good sector, so that prices and wages are endogenous, and price effects are included into the analysis.…”

“…As our framework deals with an arbitrary trade cost structure between countries, our results go beyond the analysis of specific examples such as the symmetric or the hub‐and‐spoke configurations studied by Puga and Venables (). Moreover, unlike in Ossa (), no trade restriction is placed between countries. Hence, our model deals with general trade patterns allowing for asymmetries in country sizes and trade costs.…”

Buying Locally

“…This gives rise to a price index effect, highlighted (for example) by Venables (). Ossa () shows that firms will also relocate from the foreign to the domestic country. Since they are imperfectly competitive and earn positive profits, this relocation brings a welfare gain.…”

“…In contrast, our buy local arrangements require no relocations to bring welfare gains. Ossa () examines a version of the model examined in Ossa () in which firms are precluded from relocating. In this case, profits instead of firms shift into the domestic country, much like the profit‐shifting effects of our buy local arrangements, though Ossa () does not examine preferential trade agreements.…”