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.
Highlights
One of the most debated issues in international economics is whether regionalism or multilateralism is the most effective strategy for achieving global free trade
We show that an agenda setter who makes take-it-or-leave-it offers to follower countries may not be sufficient for global free trade when (i) following a rejection of its offer by a follower country in the first stage of the sequential subgame, the leader is allowed to make an offer to the second follower country in stage two; or (ii) the leader cannot commit to a payoff to the follower country in the first stage of the sequential bargaining subgame
31 as we have shown, the bargaining protocol need not be restricted to sequential or multilateral bargaining in order to achieve global free trade when payoffs are GC superadditive, restrictions on bargaining may be desirable for other reasons
Summary
One of the most debated issues in international economics is whether regionalism or multilateralism is the most effective strategy for achieving global free trade. A preferential trade agreement may exert a negative externality on outside countries, as in Baldwin (1996), and make sequential negotiations more attractive for the agenda-setter, grand-coalition superadditivity ensures that multilateral negotiations lead to global free trade. A building bloc equilibrium is one in which the agenda setter prefers sequential bargaining that leads to global free trade rather than multilateral bargaining that preserves the status quo We illustrate such equilibria with two examples in which negotiators maximize a function that describes a political objective, using an extreme version of the Grossman and Helpman (1994) model of politics with special interest groups in which this political-objective function coincides with aggregate profits.
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