The Theory of Trade Policy and Trade Agreements: A Critique

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But it displays two puzzles that cast doubt on its practical relevance: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper examines the consistency of the implications of the Received Theory with actual trade policy. The basic conclusion is that the theory is inconsistent with reality. Furthermore, it is the role of terms-of-trade externalities — the central component of the Received Theory — that is the sole cause of this inconsistency.Political externalities, trade agreements, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle

The Greater the Differences, the Greater the Gains?

This paper addresses the fundamental question of whether, in a comparative-advantage context, the gains from trade will be greater when the differences between trading countries are greater. Such a presumption is established. The paper then discusses circumstances that could cause the presumption to fail.trade gains, international differences

Trade Policies Based on Political Externalities: An Exploration, Third Version

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper addresses inter-governmental political externalities in a model with terms-of-trade externalities. The model resolves the Terms-of-Trade Puzzle if and only if political externalities dominate terms-of-trade externalities. But it resolves the Anti-Trade-Bias Puzzle, and delivers results consistent with what we actually observe, only if terms-of-trade externalities play no role whatsoever.Political externalities, trade agreements, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle

The Greater the Differences, the Greater the Gains?, Second Version

This paper addresses the fundamental question of whether, in a comparative-advantage context, the gains from trade will be greater when the differences between trading countries are greater. Such a presumption is established. The paper then discusses circumstances that could cause the presumption to fail.trade gains, international differences

Punishment and Dispute Settlement in Trade Agreements.

This paper interprets dispute settlement procedures and punishments as responses to the fact that trade agreements are incomplete contracts. If no weight is given to the adjudication phase and if the degree of trade relatedness is known with certainty, the negotiated trade agreement will feature commensurate punishments, will induce violation of the dispute settlement ruling, and will deliver optimal liberalization and optimal unilateral trade-related action. With the adjudication phase of concern, the trade agreement will feature less liberalization, but still with a presumption of at least approximate commensurate punishment. The optimal trade agreement will likely induce abiding by the ruling when negotiators attach more importance to the adjudication phase, and violating it when they attach less.

VALUING ELECTRICITY ASSETS IN DEREGULATED MARKETS: A REAL OPTIONS MODEL WITH MEAN REVERSION AND JUMPS

Valuation of electricity generating assets is of central importance as utilities are forced to spin-off generators with the introduction of competitive markets. A continuous-time mean reverting price path with stochastic upward jumps is proposed as an appropriate model for long-run competitive electricity prices faced by a generator. A real options model is derived via dynamic programming using infinite series solutions. The derived model produces asset values which are uniformly higher than those produced by existing models, and which accurately predict observed generator sale prices. The model has favorable implications for stranded cost recovery and generator entry in competitive markets.real options, electricity deregulation, mean reversion, jump processes, asset valuation, Marketing,

Trade Agreements Based on Political Externalities, Second Version

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements. This paper introduces inter-governmental political externalities into a model with terms-of-trade externalities. It delivers results consistent with what we actually observe, and thus resolves the puzzles, if and only if political externalities dominate terms-of-trade externalities.Political externalities, trade agreements, reciprocity, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle