Working Paper: NBER ID: w15444
Authors: Kyle Bagwell; Robert W. Staiger
Abstract: We consider the purpose and design of trade agreements in imperfectly competitive environments featuring firm-delocation effects. In both the segmented-market Cournot and the integrated-market monopolistic competition settings where these effects have been identified, we show that the only rationale for a trade agreement is to remedy the inefficiency attributable to the terms-of-trade externality, the same rationale that arises in perfectly competitive markets. Furthermore, and again as in the perfectly competitive benchmark case, we show that the principle of reciprocity is efficiency enhancing, as it serves to "undo" the terms-of-trade driven inefficiency that occurs when governments pursue unilateral trade policies. Our results therefore indicate that the terms-of-trade theory of trade agreements applies to a broader set of market structures than previously thought.
Keywords: Trade Agreements; Imperfect Competition; Terms of Trade; Reciprocity
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade agreements remedy inefficiencies attributable to terms-of-trade externalities (F13) | Market inefficiencies (G14) |
| Unilateral trade policies (F13) | Trade agreements can correct inefficiencies (F13) |
| Trade agreements can lead to improved welfare outcomes (F13) | Aligning government policies with efficient trade practices (F13) |
| Terms-of-trade theory of trade agreements is applicable to a broader range of market structures (F12) | Trade agreements enhance efficiency (F15) |
| Reciprocity enhances efficiency (D61) | Counteracting terms-of-trade driven inefficiencies (F16) |
| Asymmetry in terms-of-trade effects between import tariffs and export taxes (F14) | Unique consideration in trade agreements (F13) |