Heckscher-Olin Theory and Non-Competitive Markets

This paper derives statements of the Heckscher-Ohlin Theorem which remain valid in the presence of market power. Following Helpman (1 984a), the paper explores restrictions on permissible trade patterns that are implied by the post-trade equilibrium conditions of Heckscher- Ohlin theory. Restrictions on the patterns of commodity trade are derived to complement Helpman's factor content version of the competitive Heckscher-Ohlin theory, and the introduction of factor market power is shown to leave the validity of these restrictions unaffected, Restrictions on the pattern of Heckscher-Ohlin trade in the presence of product market power are also derived, and conditions are stated under which Helpman's competitive factor content restrictions continue to hold.

A Theory of Gradual Trade Liberalization

This paper proposes a theory of gradual trade liberalization. I consider countries that are limited to self-enforcing arrangements in their trade relations. I argue that enforcement problems associated with the maintenance of low cooperative tariffs are exacerbated by the presence of resources in the import-competing sector that are (or potentially could be) earning rents from their sector-specific skills. Intuitively, by being able to transform into rents a portion of what otherwise would be dead weight loss under a tariff hike, the presence of such resources makes deviation from a low cooperative tariff to a high tariff more desirable for the deviating country, and makes punishments under reciprocally high tariffs less painful. Hence, the presence of rent-collecting resources in an import-competing sector acts as a deterrent to trade liberalization. But if an initial 'round' of liberalization can induce at least a portion of these resources in the import-competing sector to relocate to the rest of the economy, and if by not using their sector-specific skills these resources stand to lose them, then the enforcement issues associated with their presence will also diminish over time, and further rounds of liberalization are made possible by the effects of the initial round. I formalize this gradual process of trade liberalization, and explore the consequences of a failed round of liberalization for the ability to maintain current levels of cooperation.

National Sovereignty in an Interdependent World

What are the sovereign rights of nations in an interdependent world, and to what extent do these rights stand in the way of achieving important international objectives? These two questions rest at the heart of contemporary debate over the role and design of international institutions as well as growing tension between globalization and the preservation of national sovereignty. In this paper, we propose answers to these two questions. We do so by first developing formal definitions of national sovereignty that capture features of sovereignty emphasized in the political science literature. We then utilize these definitions to describe the degree and nature of national sovereignty possessed by governments in a benchmark (Nash) world in which there exist no international agreements of any kind. And with national sovereignty characterized in this benchmark world, we then evaluate the extent to which national sovereignty is compromised by international agreements with specific design features. In this way, we delineate the degree of tension between national sovereignty and international objectives and describe how that tension can be minimized and in principle at times even eliminated through careful institutional design.

Domestic Policies, National Sovereignty and International Economic Institutions

To what extent must nations cede control over their economic and social policies if global efficiency is to be achieved in an interdependent world? This question is at the center of the debate over the future role of GATT (and its successor, the WTO) in the realm of labor and environmental standards. Current GATT rules reflect the primacy of market access concerns in GATT practice, and this orientation is seen increasingly as unfriendly to labor and environmental causes. Fundamental changes to GATT are being considered as a result, changes that would expand the scope of GATT negotiations to include labor and environmental policies, and would lead to a significant loss of sovereignty for national governments. In this paper we establish that there is no need for the WTO to expand the scope of its negotiations in this way. We show instead that the market access focus of current GATT rules is well-equipped to handle the problems associated with choices over labor and environmental standards, and that with relatively modest changes that grant governments more sovereignty, not less, these rules can in principle deliver globally efficient outcomes.

Can the Doha Round be a Development Round? Setting a Place at the Table

A fundamental objective of the Doha Round of WTO negotiations is to improve the trading prospects of developing countries. The 2001 declaration from the WTO Ministerial Conference in Doha, Qatar, commits the member governments to negotiations aimed at substantial improvements in market access with a view to phasing out export subsidies, while embracing “special and differential treatment” for developing countries as an integral part of all elements of the negotiations. The main message of this paper comes in three parts. First, these stated aims are incompatible from the perspective of our economic analysis; thus, if these aims are pursued as stated, then we conclude that they are unlikely to deliver the meaningful trade gains for developing countries that the WTO membership seeks. Second, in attempting to integrate its developing country membership into the world trading system, the WTO may face a “latecomers” problem that, while occurring also in earlier rounds, is unprecedented in its scale in the Doha Round, and which could potentially account for the current impasse. And third, we argue that if the Round maintains its stated aims but moves away from the non-reciprocal special-and-differential treatment norm as the cornerstone of the approach to meeting developing country needs in the WTO, and if developing countries prepare, in markets where they are large, to come to the bargaining table and to negotiate reciprocally with each other and with developing nations, then it might be possible to break the impasse at Doha, to address the latecomers problem, and to deliver trade gains for developing countries.

GATT-Think

We describe recent work on the theory of trade agreements that speaks to the purpose and design of GATT. Our discussion proceeds in three steps. First, we examine the purpose of a trade agreement. In both the traditional economic and the political-economy approaches to the study of trade agreements, the problem for a trade agreement to solve is the excessive protection that arises in the absence of an agreement as a consequence of the terms-of-trade externality. Second, we consider the origin and design of GATT. We note that GATT is a rules-based institution whose origin can be traced to the disastrous economic performance that accompanied the high tariffs of the 1920's and 1930's. Finally, we review the theoretical literature that interprets and evaluates the institutional features found in GATT. We consider in particular whether GATT articles can be interpreted as offering negotiation rules that help governments undo the inefficient restrictions in trade that are caused by the terms-of-trade externality. On the whole, our review suggests that the core principles of GATT indeed may be interpreted in this manner. Specifically, we report findings that indicate that the principles of reciprocity and non-discrimination work in concert to remedy the inefficiency created by the terms-of-trade externality. We also extract a variety of predictions from the literature on enforcement and trade policy, and we argue that these predictions are broadly compatible with both the design of GATT and certain historical experiences in trade-policy conduct. We thus interpret the literature reviewed here as providing a strong presumption for the view that GATT can be understood as an institution whose central principles are well-designed to assist governments in their attempt to escape from a terms-of-trade-driven Prisoners' Dilemma. Our review therefore offers support for the (politically-augmented) terms-of-trade theory as an appropriate framework within which to interpret and evaluate GATT.

Subsidy Agreements

International disputes over subsidies are increasingly disrupting the world trading system. The creation of the WTO was nearly prevented by disputes in the Uruguay Round of GATT negotiations over the issue of negotiating disciplines on agricultural subsidies, an issue which continues to plague the ongoing Doha Round of WTO negotiations. Ongoing disputes over subsidies that violate existing WTO rules have led to the largest amount of authorized retaliation in GATT/WTO history. Yet the international rules that govern subsidies have received little attention in the form of systematic economic analysis. In this paper we provide a first formal analysis of the international rules that govern the use of subsidies to domestic production (as distinct from export subsidies). Our analysis highlights the impact of the new disciplines on subsidies that were added to GATT rules with the creation of the WTO. Our results suggest that, although GATT subsidy rules were typically viewed as weak and inadequate while the WTO subsidy rules are seen as representing a significant strengthening of multilateral disciplines on subsidies, the key changes introduced by the WTO subsidy rules may ultimately do more harm than good to the multilateral trading system, by undermining the ability of tariff negotiations to serve as the mechanism for expanding market access to more efficient levels.

Rules and Discretion in Trade Policy

We argue in this paper that the second-best nature of trade-policy intervention makes it likely that the issue of time consistency viii be an important consideration in determining both the extent and the efficacy of such intervention in most environments. The point is seen most directly by noting that a tariff is both a tax on consumers and a subsidy to producers of the import-competing good. Since first-best intervention typically calls for targeting each distortion with a separate tax/subsidy, the tariff will be a more effective policy tool if its consumption tax aspect can be separated from its production subsidy dimension. Consequently, if production decisions are made prior to consumption decisions, a government with sufficient policy flexibility will be tempted to surprise producers with policies other than those announced in an effort to make this separation. This leads optimal trade policy intervention to be time-inconsistent in a wide range of environments. We explore this idea in general terms and illustrate the results with specific examples.