Size Inequality, Coordination Externalities and International Trade Agreements

Developing countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation. such as the WTO. but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it Includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.

Tariff retaliation versus financial compensation in the enforcement of international trade agreements

The authors analyze whether financial compensation is preferable to the current system of dispute settlement in the World Trade Organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members. They show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium. However, fines suffer from an enforcement problem since they must be paid by the violating country. If fines must ultimately be supported by the threat of retaliatory tariffs, they fail to yield a more cooperative outcome than the current system. The authors also consider the use of bonds as a means of settling disputes. If bonds can be posted with a third party, they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation.Free Trade,International Trade and Trade Rules,Contract Law,Tax Law,Economic Theory&Research

Trade preferences to small developing countries and the welfare costs of lost multilateral liberalization

The proliferation of preferential trade liberalization over the past 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicates this is the case even for unilateral preferences that industrial countries provide to small and poor countries but there is no estimate of the resulting welfare costs. To avoid this stumbling block effect the authors suggest replacing unilateral preferences by a fixed import subsidy. They argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a Pareto improvement. More important, the authors provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5,000 products they calculate the welfare effects of the United States, European Union, and Japan switching from unilateral preferences to the developing countries to the import subsidy scheme. Even in a model with no dynamic gains to trade the authors find that the switch produces an annual net welfare gain for the 170 countries ($4,354 million) and for each group: the United States, European Union, and Japan ($2,934 million), the developing countries ($520 million), and the rest of the world ($900 million).TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,Economic Theory&Research,Trade and Regional Integration,Export Competitiveness

The clash of liberalizations : preferential versus multilateral trade liberalization in the European Union

There has been an explosion in the number of preferential trade agreements in the past decade. Preferential trade agreements are characterized by liberalization with respect to only a few partners and thus they can potentially clash with and retard multilateral trade liberalization. Despite this important concern with preferential trade agreements, there is almost no systematic evidence on whether they actually affect multilateral trade liberalization. The authors model the effect of preferential trade agreements on multilateral trade liberalization and show that preferential trade agreements slow down multilateral trade liberalization unless they havea common external tariff and allow for internal transfers. Next, they use detailed data on product-level tariffs negotiated by the European Union in the past two multilateral trade rounds to structurally estimate their model. The authors confirm the main prediction-the European Union's preferential trade agreements have clashed with its multilateral trade liberalization--and find that the effect is quantitatively significant. Moreover, they also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of multilateral liberalization in the European Union.Economic Theory&Research,Rules of Origin,Export Competitiveness,Environmental Economics&Policies,Trade Policy,Environmental Economics&Policies,Economic Theory&Research,Trade and Regional Integration,Trade Policy,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Infrastructure, geographical disadvantage, and transport costs

The authors use three different data sets to investigate how transport depends on geography and infrastructure. Landlocked countries have high transport costs, which can be substantially reduced by improving the quality of their infrastructure and that of transit countries. Analysis of bilateral trade data confirms the importance of infrastructure. The authors estimate the elasticity of trade flows with regard to transport costs to be high, at about -2.5. This means that: 1) The median landlocked country has only 30 percent of the trade volume of the median coastal economy. 2) Halving transport costs increases the volume of trade by a factor of five. 3) Improving infrastructure from the 75th to the 50th percentile increases trade by 50 percent. Using their results and a basic gravity model to study Sub-Saharan African trade, both internally and with the rest of the world, the authors find that infrastructure problems largely explain the relatively low levels of African trade.Banks&Banking Reform,Economic Theory&Research,Common Carriers Industry,Transport Economics Policy&Planning,Municipal Financial Management,Municipal Financial Management,Common Carriers Industry,Transport Economics Policy&Planning,Economic Theory&Research,Banks&Banking Reform

Geographical disadvantage - a Heckscher-Ohlin-von Thunen model of international specialization

The combination of distance, poor infrastructure, and being landlocked by neighbors with poor infrastructure, can make transport costs many times higher for some developing countries than for most others. Drawing on two traditions of economic modeling --Heckscher-Ohlin trade theory and von Thunen's work on the"isolated state"- the authors analyze the trade and production patterns of countries located at varying distances from an economic center. Predicting a country's production and trade pattern requires a knowledge of the country's location, its factor endowment, and the factor and transport intensities of goods. The authors define transport intensity and show how location and transport intensity should be combined with factor abundance and factor intensity, in determining trade flows. A theory based on only one set of those variables, such as factor abundance, will systematically make incorrect predictions. They report that geography and endowments interact in such a way that the world divides up into economic zones with different trade patterns. Countries close to the economic center may specialize in transport-intensive activities; countries further out become diversified, producing, and sometimes trading more goods; countries still further out may become import-substituting (replacing some of their imports from the center with local production); in the extreme, regions become autarkic. More remote locations have lower real incomes. Globalization changes the terms of trade, improving the welfare of regions further out from economic centers, though reducing the welfare of closer regions. Where will a new activity, such as assembly of a new product, locate? Remote locations are disadvantaged if the product has high transport intensity (perhaps because of heavy requirements for intermediate inputs). But the costs of remoteness are already incorporated into the factor prices of those regions, which makes them more attractive. Which location is chosen depends, therefore, on how existing activities compare with the new activity in transport intensity and factor intensity.Transport Economics Policy&Planning,Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Labor Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Banks&Banking Reform,Transport Economics Policy&Planning,Economic Theory&Research,Environmental Economics&Policies

Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?

In many preferential trade agreements (PTAs), countries exchange not only reductions in trade barriers but also cooperation in non-trade issues such as labour and environmental standards, intellectual property, etc. We provide a model of PTAs motivated by cooperation in non-trade issues and analyse its implications for global free trade and welfare. We find that such PTAs increase the cost of multilateral tariff reductions and thus cause a stumbling block to global free trade. This occurs because multilateral tariff reductions decrease the threat that can be used in PTAs and thus the surplus that can be extracted from them. By explicitly modelling the interaction between preferential and multilateral negotiations, we derive a testable prediction and provide novel econometric evidence that supports the model's key prediction. The welfare analysis shows that the current World Trade Organization rules allowing this type of PTAs may be optimal for economically large countries, thus the model can predict the rules we observe. We also analyse alternative rules that constitute a Pareto improvement. Copyright 2007 The Review of Economic Studies Limited.

Size Inequality, Coordination Externalities and International Trade Agreements

Developing countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation---such as the WTO---but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.Developing countries, WTO, Trade, Tariffs, Reciprocity, Policy Coordination, Bonds, Transfers