Negotiating Free Trade

Abstract

We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both "building bloc" and "stumbling bloc" effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.

Preferential versus multilateral trade liberalization and the role of political economy

“…The debate about the e¤ect of PTAs on the trade system centers around the terms 1 As of 15 June 2014, 585 noti…cations of PTAs (counting goods and services separately) had been received by the World Trade Organization (WTO). Of these noti…cations, 379 PTAs are already in force with others scheduled for implementation in the near future.…”

“…Of the three approaches, preferential trade liberalization gained the most popularity in recent years, with the number of preferential trade agreements (PTAs) increased four-fold since completion of the Uruguay round of WTO negotiations in 1994. 1 In contrast, the last round of the multilateral trade talks -the Doha Roundhave failed to come to a fruitful conclusion despite thirteen years of intense negotiations.…”

Is the GATT/WTO's Article XXIV bad?

“…Note that Article XXIV is not the main focus of Bagwell and Staiger's analysis and they do not actually study equilibrium under its conditions. 8 The literature on the dynamics of trade liberalization examines the possibility that trade agreements give way to world free trade at a later stage; see Riezman (1999), Aghion et al (2007), Seidmann (2009) and Saggi et al (2010) for recent contributions. Building on Baldwin (1996), Krishna (1998) shows how political interests can undermine the progression from regionalism.…”

Gradualism and uncertainty in international union formation: The European Community’s first enlargement

“…Harstad (2007) actually addresses the trade-off between strategic delay in the process of political centralization and the cost of policy uniformity using a similar signaling mechanism to the one below, albeit within a two-region framework, which implies that he does not consider the possibility of endogenous enlargement. Aghion et al (2007) employ an analogous dynamic bargaining framework in the context of international free trade agreements to model the choice of a 'leading country' between sequential and multilateral negotiations and how it depends on the structure of trade and protection. Finally, the idea of gradual and partial coalition-formation in international cooperation is also characteristic of Bordignon and Brusco's (2006) paper on the efficiency and distributional effects of subunion formation within the context of a policy centralization game with shifting 'gains from trade'.…”