Free Trade Areas with Politically Active Oligopolies

I evaluate in this paper the effects of Free-Trade Areas (FTAs) on the incentives for further multilateral liberalization (ML) using a model that emphasizes the role of oligopolistic industries in creating both reasons for strategic trade policies and political pressures aimed to affect trade policy decisions. In this context, I find that FTAs are in general unable to undermine an otherwise feasible ML process. The primary reason regards an identified "tariff complementarity effect," which indicates that a FTA induces its members to reduce their remaining tariffs. This effect reflects mainly the reduction of the strategic reasons from protection under a FTA, and ensures a move toward "trade creation." The introduction of political pressures may revert that result. Nevertheless, this would happen only in the presence of coordination failures between the national oligopolies, and even in that case such undermining would be unlikely to occur.

Trust-based trade

Weak enforcement of international contracts can substantially reduce international trade. We develop a model where agents build reputations to overcome the difficulties that this institutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. We find that the conditional probability that a firm will stop exporting decreases and its foreign sales increase as the firm acquires greater export experience. The reason is that the informational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of both current and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low

Trust-Based Trade

There is substantially more trade within national borders than across borders. An important explanation for this fact is the weak enforcement of international contracts. We develop a model in which agents build reputations to overcome this institutional failure. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. It also rationalizes several empirical regularities. We find that history matters for trade volumes, but that its effects vary with the institutional setting of the country. The same is true for the efficacy of trade liberalization programs. Moreover, while stricter enforcement of contracts enhances trade in the short run, it makes it harder for individual traders to develop good reputations. We show that this indirect negative effect may produce an "institutional trap": for sufficiently low initial levels of contract enforcement, a small tightening in enforcement reduces future trade flows. We find also that search frictions aggravate the problems created by weak enforceability of contracts, even if they impose no direct cost on agents, but that trade liberalization can mitigate these negative effects.International trade, Export dynamics, Contract enforcement, Reputation

Regional trade agreements: blessing or burden?

There has been a proliferation of regional trade agreements around the world since the early 1990s. In a survey of the latest theoretical and empirical research on regionalism, Caroline Freund and Emanuel Ornelas ask whether we should celebrate or be concerned about this trend.regional trade, trade negotiations, regionalism

Trust-Based Trade

Weak enforcement of international contracts can substantially reduce international trade. We develop a model where agents build reputations to overcome the difficulties that this institutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. We find that the conditional probability that a firm will stop exporting decreases and its foreign sales increase as the firm acquires greater export experience. The reason is that the informational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of both current and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low.International trade, Export dynamics, Contract enforcement

Regional Trade Agreements

This paper reviews the theoretical and the empirical literature on regionalism. The formation of regional trade agreements has been, by far, the most popular form of reciprocal trade liberalization in the last fifteen years. The discriminatory character of these agreements has raised three main concerns: that trade diversion would be rampant, because special interest groups would induce governments to form the most distortionary agreements; that broader external trade liberalization would stall or reverse; and that multilateralism could be undermined. Theoretically, all of these concerns are legitimate, although there are also several theoretical arguments that oppose them. Empirically, neither widespread trade diversion nor stalled external liberalization have materialized, while the undermining of multilateralism has not been properly tested. There are also several aspects of regionalism that have received too little attention from researchers, but which are central to understanding its causes and consequences.regionalism, trade creation, trade diversion, external tariffs, trade liberalization

Efficient Dissolution of Partnerships and the Structure of Control

In this paper, we study efficient dissolution of partnerships in a context of incomplete information. We generalize the results of Cramton, Gibbons and Klemperer (1987) to situations where the partnership takes on a common value that may depend upon all partners' types, so that each partner's individual rationality constraint depends on types other than his own. We show that in this case not only the distribution of ownership, emphasized in the earlier literature, but also the distribution of control within an organization matter in determining the possibility of efficient dissolution. We underscore this point by showing that two-person partnerships where one partner exercises complete control cannot be dissolved efficiently with any incentive compatible, individually rational mechanism, regardless of the ownership structureMechanism design, efficient trading, asymmetric control, partnerships

Protection and International Sourcing

We study the impact of import protection on relationship-specific investments, organizational choice and welfare. We show that a tariff on intermediate inputs can improve social welfare through mitigating hold-up problems. It does so if it discriminates in favor of the investing party, thereby improving its bargaining position. On the other hand, a tariff can prompt inefficient organizational choices if it discriminates in favor of less productive firms or if integration costs are low. Protection distorts organizational choices because tariff revenue, which is external to the firms, drives a wedge between the private and social gains to offshoring and integration.International trade, tariffs, hold-up problem, sourcing, organizational form

Behavior and Effects of Equity Foreign Investors on Emerging Markets

This paper analyzes empirically the behavior of foreign investors on emerging equity markets in a cross-country setting, including 14 emerging markets from the year 2000 to 2005. We could find little evidence that these investors have brought problems to local emerging markets. Foreign investors seem to build and unwind their positions on emerging stock markets slowly enough to avoid problems as price pressure or volatility and kurtosis upswings on the stock market. Also, no negative effects on the foreign exchange market could be found. Regarding feedback trading, we support two hypotheses: positive feedback trading by hedged investors and negative feedback trading by unhedged investors. The latter has stronger statistical evidence and is more likely to occur in the real world. We conclude that there is no reason to impose long-term restrictions to foreign flows.