This paper considers trade agreement outcomes based on the principle of reciprocity in a setting where governments negotiate tariff cuts to shift rents to politically-powerful exporters. I develop a concept of reciprocity that both nests prior approaches and selects a Pareto efficient outcome for trade agreements in my setting of interest. In the negotiations, the agreed tariff cuts effectively substitute for export policies and deliver the same amount of liberalization as if governments negotiated directly over export policies. Exporters with greater political power then compel greater reductions in cooperative import tariffs through trade negotiations --- reductions so large that losses to domestic firms from import competition outweigh gains from cheaper imports. Because governments deviating from the negotiated outcome can achieve first-order gains by increasing prices for the import-competing sector, even without terms-of-trade gains, the model provides a new common explanation for a variety of trade policy observations, such as temporary trade barriers from small countries, red-tape barriers, and globalization backlash.   Close

This paper proposes a theory of subsidy bans that aligns well with their negotiating history across major sectors. A challenge for standard trade agreement theories is explaining why countries would cooperate to ban trading partner's export-promoting subsidies, which improve the terms of trade of imports. Trade negotiation records suggest a rationale to explore formally: concerns over lost sales of import-competing firms dominate other concerns as markets integrate. The challenge for building this motive into theory is that government preferences implying subsidy bans also imply that nations would not open markets through tariff cuts in the first place. To resolve this challenge, I consider governments who pursue tariff cuts in negotiations as a second-best approach for shifting rents to exporters. Given any motive to promote exporters, countries negotiate tariff cuts so large that they seek price increases in import sectors. Sufficient desire to prevent further price decreases in import sectors then motivates enforcement of subsidy bans. The subsidy bans are desirable only after sufficient trade frictions have been removed, so the theory aligns well with the history that consensus subsidy restrictions were achieved first in manufacturing, then in agriculture, and not yet in services.  Close

In trade agreements, governments can design remedies to ensure compliance (property rule) or to compensate victims (liability rule). This paper describes an economic framework to explain the pattern of remedies over non-tariff restrictions---particularly domestic subsidies and nonviolation complaints subject to liability rules. The key determinants of the contract form for any individual measure are the expected joint surplus from an agreement and the expected loss to the constrained government. The loss is higher for domestic subsidies and nonviolations because these are the policies most likely to correct domestic distortions. Governments choose property rules when expected gains from compliance are sufficiently high and expected losses to the constrained country are sufficiently low. Liability rules are preferable when dispute costs are relatively high, because inefficiencies in the compensation process reduce the number of socially inefficient disputes filed.   Close

Many international trade agreements regulate the use of domestic policies. One approach is "deep" integration, in which governments contract directly over domestic policies. An appealing alternative is "shallow" integration, in which nations contract over market access and avoid negotiations over specific policies. I generalize the shallow integration approach to a two-country differentiated-product setting. Governments choose trade policies and two domestic policies: a wage subsidy and a policy reducing the capital requirement for firm entry. I show that the sole source of international inefficiency is terms-of-trade manipulation and that the appropriate terms-of-trade definition here is a world price index. Shallow integration works because changes in domestic policies and trade policies that preserve market access also preserve the terms of trade. I discuss potential obstacles for shallow integration. Absent trade policy cooperation, direct negotiations over the wage subsidy cannot benefit governments, but direct negotiations over the entry policy provide a second-best benefit. The efficient agreement in theory differs significantly from the shallow integration approach of the General Agreement on Tariffs and Trade (GATT).