Preferential Trade Agreements and the World Trade System: A Multilateralist View

This paper reviews recent developments in international trade to evaluate several arguments concerning the merits of preferential trade agreements (PTAs) and their place in the world trade system. Taking a multilateralist perspective, it makes several points: First, despite the proliferation of PTAs in recent years, the actual amount of liberalization that has been achieved through PTAs is actually quite limited. Second, at least a few studies point to significant trade diversion in the context of particular PTAs and thus serve as a cautionary note against casual dismissals of trade diversion as a merely theoretical concern. Equally, adverse effects on the terms-of-trade of non-member countries have also been found in the literature. Third, while the literature has found mixed results on the question of whether tariff preferences help or hurt multilateral liberalization, the picture is different with the more elastic tools of trade policy, such as antidumping duties (ADs); the use of ADs against non-members appears to have dramatically increased while the use of ADs against partner countries within PTAs has fallen. Fourth, despite the rapid expansion of preferences in trade, intra-PTA trade shares are relatively small for most PTAs; multilateral remain relevant to most member countries of the WTO.

Reciprocated Unilateralism in Trade Policy: An Interest-Group Approach

Using the menu-auction approach to endogenous determination of tariffs and allowing additionally for lobby formation itself to be endogenous, this paper analyzes the impact of unilateral trade liberalization by one country on its partner's trade policies. We find that such unilateral liberalization may induce reciprocal tariff reductions by the partner country. Intuitively, unilateral liberalization by one country has the effect of increasing the incentives for the export lobby in the partner country to form and to lobby effectively against the import-competing lobby there for lower protection.

Reciprocated Unilateralism in Trade Reforms with Majority Voting

This paper shows how unilateral liberalization in one country can increase the voting support for reciprocal reduction in trade barriers in a partner country. When trade policies are determined simultaneously in the two countries, we show the possibility of multiple political equilibria - countries may both be protectionist or trade freely with each other. Starting with trade protection in both countries, a unilateral reform in one country is thus shown to bring about a free trade equilibrium (a self-enforcing state) that is consistent with majority voting in both countries.

Trade Policy, Income Risk, and Welfare

This paper studies empirically the relationship between trade policy and individual income risk faced by workers, and uses the estimates of this empirical analysis to evaluate the welfare effect of trade reform. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, we find that trade policy changes have a significant short run effect on income risk. Further, while the tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.

Foreign Lobbies and US Trade Policy

In popular discussion much has been made recently of the susceptibility of government policies to lobbying by foreigners. The general presumption has also been that such interactions have a deleterious effect on the home economy. However, it can be argued that, in a trade policy context, bending policy in a direction that would suit foreigners may not in fact be harmful: If the policy outcome absent any lobbying by foreigners is characterized by welfare-reducing trade barriers, lobbying by foreigners may result in reductions in such barriers and raise consumer surplus (and possibly improve welfare). Using a new data set on foreign political activity in the US, this paper investigates the relationship between trade protection and lobbying activity empirically. The approach taken in this paper is primarily a structural one. To model the role of foreign and domestic lobbies in determining trade policy, we develop first a theoretical framework building on the well-known work of Grossman and Helpman (1994); the econometric work that follows is very closely linked to the theory. Our analysis of the data suggests that foreign lobbying activity has significant impact on trade policy - and in the predicted direction: Tariffs and non-tariff barriers (NTBs) are both found to be negatively related with foreign lobbying activity. We consider also extended specifications in which we include a large number of additional explanatory variables that have been suggested in the literature as determinants of trade policy (but that emerge from outside of the theoretical structure described above) and confirm the robustness of our findings in this setting.

Trade and Inequality in India

To study the effects of the dramatic economic reforms undertaken in India in the early 1990s on inequality, this paper uses the Theil inequality measure constructed using Indian household expenditure survey data from 1988-2005. Overall inequality shows some variation over the period, rising between 1988 and 1994 and again between 1994 and 2000, but falling by 2005 to roughly the pre-reform level. Furthermore, in the post reform period (between 1994 and 2005), inequality fell in most Indian states, with rural areas in most states and urban areas in about half the states experiencing a statistically significant reduction in inequality. The change in inequality across households within states is found to uncorrelated with the change in state-level measures of tariff and non-tariff protection