Working Paper: NBER ID: w11716
Authors: Giovanni Maggi; Andres Rodriguez-Clare
Abstract: This paper presents a theory of trade agreements where "politics" play an central role. This stands in contrast with the standard theory, where even politically-motivated governments sign trade agreements only to deal with terms-of-trade externalities. We develop a model where governments may be motivated to sign a trade agreement both by the presence of standard terms-of-trade externalities and by the desire to commit vis-a-vis domestic industrial lobbies. The model is rich in implications. In particular, it predicts that trade agreements result in deeper trade liberalization when governments are more politically motivated (provided capital mobility is sufficiently high) and when capital can move more freely across sectors. Also, governments tend to prefer a commitment in the form of tariff ceilings rather than exact tariff levels. In a fully dynamic specification of the model, trade liberalization occurs in two stages: an immediate slashing of tariffs and a subsequent gradual reduction of tariffs. The immediate tariff cut is a reflection of the terms-of-trade motive for the agreement, while the domestic-commitment motive is reflected in the gradual phase of trade liberalization. Finally, the speed of trade liberalization is higher when capital is more mobile across sectors.
Keywords: Trade Agreements; Political Economy; Capital Mobility; Trade Liberalization
JEL Codes: D72; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital mobility (F20) | trade liberalization (F13) |
| political motivations (D72) | trade liberalization (F13) |
| domestic-commitment motive (D10) | trade liberalization (F13) |
| political motivations (D72) | domestic-commitment motive (D10) |
| trade liberalization (F13) | resistance from import-competing lobbies (F14) |
| capital mobility (F20) | speed of trade liberalization (F13) |
| trade agreements (F13) | tariff ceilings (E64) |
| tariff ceilings (E64) | ongoing lobbying and contributions (D72) |
| speed of trade liberalization (F13) | capital mobility (F20) |