The Farsighted Stability of Global Trade Policy Arrangements

Stefan Berens,Lasha Chochua

doi:10.2139/ssrn.3075089

Abstract

In this paper, we study and compare the stability of trade policy arrangements in two different regulatory scenarios, one with and one without Preferential Trade Agreements (PTAs), i.e. current vs. modified WTO rules. Unlike the existing literature, our paper considers an extensive choice set of trade constellations, containing both available PTAs, Customs Unions (CUs) and Free Trade Agreements (FTAs), as well as Multilateral Trade Agreements (MTAs), while assuming unlimited farsightedness of the negotiating parties. With symmetric countries and under both the current and the modified WTO rules, the Global Free Trade (GFT) regime emerges as the unique stable outcome. In the case of asymmetry, the results are driven by the relative size of the countries. If the world is in the vicinity of symmetry and two out of three countries are close to identical while relatively smaller than the other one, the area where the GFT regime is stable increases when prohibiting PTAs. However, when two similar countries are relatively larger, the availability of PTAs is conducive to the stability of the GFT regime. Finally, if the world is further away from symmetry, full trade liberalization is not attainable at all and an area where the Most-Favoured-Nation (MFN) regime is stable appears in the scenario without PTAs. Thus, the direction of the effect of PTAs on trade liberalization depends on the degree of asymmetry among countries.

Highlights

Following the General Agreement on Tariffs and Trade (GATT) of 1947, an ever increasing number of signatory countries liberalised their trade policies primarily via two channels: bilateral and multilateral negotiations
When all three countries enter a single Multilateral Trade Agreements (MTAs) together, which we denote by MTAGFT, the optimization problem is identical to the case of CUGFT and FTAGFT, but the regime differs in terms of network position
Article I of the World Trade Organization (WTO) aims at creating a multilateral free trading system, while Article XXIV Paragraph 5 allows countries to seemingly bypass the multilateral liberalisation process

Summary

Introduction

Following the General Agreement on Tariffs and Trade (GATT) of 1947, an ever increasing number of signatory countries liberalised their trade policies primarily via two channels: bilateral and multilateral negotiations. If all three countries form an FTA, denoted by FTAGFT, the optimization problem is identical to the case of CUGFT, but differs in terms of structure and network position (cf Section 2.2). When all three countries enter a single MTA together, which we denote by MTAGFT, the optimization problem is identical to the case of CUGFT and FTAGFT, but the regime differs in terms of network position (cf Section 2.2). The contribution in this paper of considering an extensive set of trade agreements and unlimited farsightedness comes at the cost of a relatively complex computational problem We solve this problem numerically by means of an algorithm, the pseudocode of which we provide in Appendix A.20.

Analysis

F T AGF T

Findings

Conclusion