Working Paper: NBER ID: w10721
Authors: Philippe Aghion; Pol Antràs; Elhanan Helpman
Abstract: We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both building bloc' and stumbling bloc' effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.
Keywords: Free Trade; Bargaining; Coalition Externalities
JEL Codes: C78; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coalition externalities (D79) | choice between sequential and multilateral bargaining (C78) |
| choice between sequential and multilateral bargaining (C78) | likelihood of achieving global free trade (F10) |
| no coalition externalities (D62) | grand coalition forms (D79) |
| grand coalition forms (D79) | global free trade (F10) |
| positive coalition externalities in follower countries (F55) | preference for multilateral bargaining (C79) |
| negative coalition externalities in follower countries (F64) | preference for sequential bargaining (C78) |
| preferential trade agreements permitted (F13) | global free trade (F10) |
| preferential trade agreements forbidden (F13) | global free trade (F10) |